Court of Appeal rules on calculation of holiday pay for permanent workers with irregular hours


Posted by Natalie Painter, 21st August 2019
A recent Court of Appeal case has shown how holiday pay must be calculated for term-time, casual or seasonal workers on irregular hours and zero hours workers (whether or not they are employees) and rejects a previous method of calculation commonly used in the education sector and for zero hours workers. Employers will need to ensure they are correctly calculating holiday pay, that their contracts are compliant, and consider whether there might be any liability for previous underpayments.

In The Harpur Trust v Lesley Brazel & UNISON [2019] EWCA Civ 1402, the Court of Appeal (CA) has confirmed the Employment Appeal Tribunal’s (EAT’s) ruling that holiday pay for part-year workers on irregular hours (such as music or sports teachers with irregular hours who work during term only, workers on short term contracts, retail and other workers with variable hours and pay, and zero hours workers), must be based on the actual wording of the Employment Rights Act (ERA) 1996 (as referred to in the Working Time Regulations (WTR) 1998). For workers without normal working hours, this takes a 12-week average of pay from weeks actually worked (discounting any weeks in which no work was done). Holiday pay must not be calculated as 12.07% of the hours worked in previous weeks. This calculation has been commonly used due to confusion surrounding holiday pay and holiday entitlement.

The CA held that the fact that this might give a higher amount of holiday pay to part-time workers with irregular hours compared to full-year workers (whether part-time or full-time) is not relevant as there is nothing to suggest that part-time workers cannot be treated more favourably than full-time workers. (Note that this case is not about part-time workers generally, but part-time, term-time only workers with irregular hours, or “part-year workers” as the CA referred to them.)

Facts

Ms Brazel was a music teacher employed under a permanent zero hours contract who worked irregular hours during the school year, varying between 32 and 35 weeks. In accordance with ACAS guidance at the time (which has since been removed), and as a lot of education institutions do, The Harpur Trust (“Harpur”) calculated her holiday pay entitlement at the end of each term as 12.07% of the hours she worked in the preceding term. The 12.07% figure is calculated on the basis that:

  • workers in the UK are entitled to a minimum of 5.6 weeks’ statutory holiday. When deducted from the 52 week calendar year, the working year amounts to 46.4 weeks;
  • 5.6 weeks’ annual leave equates to 12.07% of a working year of 46.4 weeks. This is sometimes also set out as 1 hour’s paid holiday per 8.28 hours worked.

Ms Brazel argued that her employer was wrong to calculate her holiday pay in this way. She argued that it instead should apply the “week’s pay” calculation as set out in section 224 ERA 1996, which applies to employments with no normal working hours and takes a 12-week average of pay from weeks actually worked (discounting any weeks in which no work was done, e.g. school holidays, half terms or other weeks where she was not required to provide lessons).

The WTR refers specifically to these sections of the ERA and in this context includes “workers” (since “workers” are entitled to holiday pay as well as employees). Ms Brazel said this proper calculation would increase her holiday pay to 17.5% of her earnings for the term.

Lower courts

At first instance, Ms Brazel’s claim for unlawful deductions from wages for the difference failed as the ET concluded that, where a worker has no normal hours and works fewer than 46.4 weeks per year, the legislation intended that holiday pay be capped at 12.07% of annualised hours.

On appeal, the EAT overturned the ET’s decision and upheld Ms Brazel’s claim. It noted that the purpose of the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 is to protect part-time workers from being treated less favourably than full-time workers. It noted that there is nothing to say that full-time workers cannot be treated less favourably than part-time workers. Therefore a part-time worker who works for only 32 weeks of the year is entitled to the same holiday pay as a worker who works irregular hours throughout each week of the year, as the part-time worker Regulations guarantee them to be treated no less favourably than full-time workers.

There is no requirement to pro-rate holiday pay for part-time workers to ensure there is no injustice to full-time workers. The fact that this might create a windfall for workers with irregular hours is irrelevant.

Court of Appeal

Harpur appealed to the CA but its appeal was dismissed. Firstly, as noted above, this case was not concerned with those who work part-time throughout the whole year. Part-time workers have their holiday entitlement and holiday pay entitlement pro-rated in accordance with their entitlement to 5.6 weeks’ leave (or any additional contractual leave they may be entitled to), a “week” being the number of hours or days they would normally work as a part timer.

In addition, although the CA did not specifically say this, the ruling does not apply to those who work for part of the year only (e.g. term-time only) but with regular hours. Under s221(2) ERA their “week’s pay” is the amount payable under the contract for doing their normal working hours.

Rather this case was concerned with part-year workers who also work irregular hours. The CA accepted that there was an “accrual approach” under the Working Time Directive (WTD) for entitlement to holiday, by which part-time workers accrue holiday in proportion to the time that they actually work. However this is not the same as the entitlement to holiday pay, which must be calculated by reference to remuneration during periods of actual work.

The CA noted that the WTR clearly points to s224 ERA to determine what a “week’s pay” is for a person with irregular hours. No additional words are required to be read into that and it is based on average pay for the previous 12 weeks, discounting any weeks where no remuneration was payable. Nothing prevents domestic law from being more generous to part-time workers than full-time workers. Therefore Ms Brazel was entitled not to have her pay capped at 12.07% of the hours she worked in the preceding term, but on the basis of the previous 12 complete weeks’ pay.

The CA accepted that this could produce anomalous results for example in the case of cricket coaches who worked for 1 term only, an individual who worked for one week in a year for £1000 who might then be entitled to £5,600 holiday pay, or exam invigilators who work only during the exam season. However the CA again noted that there was nothing to stop such part-year workers being treated more favourably than full-time workers.  It also pointed out that usually such short-term workers would be engaged on a freelance basis, rather than, as here, a permanent basis, meaning that they would only accrue holiday for the period they were engaged rather than for the whole year.

What are the implications for employers?

Due to the logistical difficulties in working out what holiday a worker with no normal working hours is entitled to (and with no definition of a week’s leave in the WTR), for convenience, many employers, especially in the education sector, have based their calculation on the 12.07% amount referred to above. This approach was previously endorsed by ACAS in their guidance from 2014, which has now been removed.

There is now however BEIS Guidance on calculating holiday pay for workers without fixed hours or pay. This useful guidance was published in February 2019 and so takes into account the EAT decision in Brazel (which the CA upheld) on using the s224 calculation for those with irregular hours.

Education sector

As for many workers in the education sector, Ms Brazel had to take holiday in the school holidays, and was entitled to be paid holiday pay 3 times a year at the end of each term based on 12.07% of the hours worked in the preceding term. In order to make the correct calculation for a worker like her, because her contract stipulated when her holiday was to be paid, it would now be a relatively straightforward calculation based on the previous 12 weeks average earnings at the point of payment, discounting any weeks not worked. For contracts written in this way, it is advisable to stipulate how much holiday is deemed to be taken in each holiday period and that this holiday is deemed to be taken from the first day of the school holidays so it is also in line with the statutory calculation.

Zero hours workers and seasonal/casual workers

Assuming this type of worker is on a permanent contract (which is more likely in the case of zero hours contracts) it becomes more difficult to work out what their entitlement to holiday is and also their entitlement to holiday pay. The WTR do not provide for accrual method of holiday except in first and last years. So:

  • We know a zero hours worker accrues 5.6 week’ holiday (or potentially more under the contract) per year, but it can be hard to work out what that is in practical terms. For zero hours contracts with no other method of holiday accrual specified or when it should be taken, employers could still use the 12.07% calculation for entitlement to the amount of holiday – so that a zero hours worker knows what holiday they can take (this may have to be reviewed/adjusted at the end of the year).
  • For zero hours contracts, pay must be based on average pay for preceding 12 weeks, discounting weeks not worked. This could be complex as employers will be looking at a different calculation each time depending on when the worker took the holiday and what they earned in the previous weeks.

Changes ahead from 6 April 2020

The calculation for all these workers will change from 6 April 2020 when the calculation of holiday pay under Reg 16 WTR, currently based on the preceding 12 weeks, will be based on pay averaged over the preceding 52 weeks (or whatever period they have been working if less). If there are weeks unworked, the changes to the WTR provide that the calculation will not look further back than the preceding 104 weeks. This will mean that if 52 paid weeks cannot be found in the previous 104, the calculation is based on the average earnings of the preceding weeks which count, however many that is. This will apply in other cases where the 12 week averaging period is used, such as where pay differs according to the time of work (e.g. night shifts).

Conclusion

Employers need to ensure they are making the correct holiday pay calculations for workers with irregular hours in similar circumstances to Ms Brazel, and for zero hours and other casual workers. If in the past holiday pay wasn’t paid at the correct rate, there is a risk that such workers could claim that there had been a series of unlawful deductions from wages. There is of course a 2-year backstop for historic holiday pay claims, but note that Ms Brazel brought her claim as a series of deductions (after the 2-year time limit was introduced) and kept resubmitting claims until the case was heard, presumably so she would not lose the right to go back further than 2 years.

In theory if the contract continues, a permanent zero hours employee (or worker) would accrue holiday even if they do no work. Under the WTR there is the “use it or lose it” principle so this should only apply to the current holiday year. However, there is also the possibility that an individual not paid holiday pay at all could allege that they weren’t given the facility to take holiday in line with the ECJ cases of Kreuziger v Berlin and Max-Planck-Gesellschaft. There are a number of complex implications when it comes to potential backdated claims and we would be happy to advise you on these or on changes to your contracts to bring them in line with the Harpur decision.

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