August 12, 2019

A holiday pay windfall for “part-year” workers?

In an important decision, the Court of Appeal has ruled that holiday pay for a teacher who worked irregular hours on a permanent term-time, or so-called "part-year" contract, should be calculated using her average earnings over a 12-week period and not pro-rated according to the proportion of the year worked. The common practice of applying a cap of 12.07 percent of annualised hours, as suggested by ACAS, was incorrect.

Background law

Under the Working Time Regulations (WTR), workers are entitled to 5.6 weeks' paid holiday. This right comes from the EU Working Time Directive which provides for a minimum of four weeks' paid annual leave.  Under the WTR, workers who work  irregular hours (such as casual, bank or zero hours workers) should be paid holiday pay calculated by reference to the average pay over the previous 12 weeks before the calculation date (which is the first day of the relevant period of leave) excluding any weeks in which no remuneration is payable.  This is to be increased to 52 weeks from 6 April 2020.

The ACAS booklet "Holidays and holiday pay" recommends that for staff working on a casual basis or very irregular hours, holiday pay should be calculated as 12.07 per cent of annualised hours, on the basis that the statutory annual leave entitlement of 5.6 weeks represents 12.07 per cent of a working year of 46.4 weeks (ie 52 weeks minus 5.6 weeks). This method effectively caps a worker's holiday pay to 12.07 per cent of annual earnings with the effect of pro-rating holiday pay entitlement for "part-year" workers (such as term time only or seasonal workers).

The facts

In Brazel v The Harpur Trust, Ms Brazel, a visiting music teacher at Bedford Girls School, was employed by the trust on a permanent zero-hours contract, typically working 10 to 15 hours a week during term time. She was paid monthly on the basis of an hourly rate applied to the hours worked in the previous month.  Her contract entitled her to 5.6 weeks' paid annual leave and required her to take her annual leave during school holidays. Her employer paid three annual payments in respect of her leave in April, August and December, calculated as 12.07 percent of her earnings in the previous term.

Ms Brazel argued that she lost out with this method of calculation as it produced a lower figure than that required by the rules in the WTR. She believed that holiday pay should be calculated by taking the average weekly remuneration for the 12 weeks prior to the calculation date and multiplying it by 5.6.  She calculated that this would give her holiday pay of around 17.5 percent of her earnings for the term.

The employment tribunal rejected Ms Brazel's claim and agreed with her employer that a part-time worker who works for only part of the year should have their holiday entitlement pro-rated to reflect the weeks they actually work.  Otherwise, a term time worker could receive a higher percentage of annual earnings as holiday pay than an employee who worked throughout the year. This would be unfair to full time workers. 

The decision

The Court of Appeal accepted that the EU Working Time Directive did not require Member States to pro-rate the leave entitlement of part-year workers to that of full year workers.  The WTR makes no provision for pro-rating, instead they require the exercise of identifying a week's pay in accordance with the rules set out in the Employment Rights Act, and multiplying that figure by 5.6 weeks. Attempting to build in a pro-rating requirement or a system of accrual would involve a totally different scheme.

The Court therefore concluded that it was wrong for term-time only workers to have their holiday pay capped at 12.07 per cent of annualised hours.  Instead, the annual holiday pay entitlement for permanent "part-year" workers should require the straightforward exercise of identifying a week's pay (taking the average pay over the last 12 weeks) and multiplying that figure by 5.6.  This was despite the fact this method could produce odd results in extreme cases and could mean that certain part-year workers could receive proportionately more holiday pay than full time workers. 

What this means for employers

The Court made it clear that its reasoning is only relevant to workers engaged on permanent contracts who work part of the year. Examples might include seasonal or term-time workers in the education or leisure sectors. This decision is not relevant to part-time workers such as those working 3 days a week over 52 weeks, or to freelancers.  Therefore, if you employ casual, bank or zero hours or other atypical workers who work only part way through the year and you currently cap holiday pay at 12.07% of annual earnings, you should consider the implications of this judgment carefully.  As well as revising your method of calculation, it may also be necessary to review your contracts of employment. 

It is likely that workers on fixed term temporary contracts (such as seasonal workers) would not be covered by this decision but it is not inconceivable that casual workers not employed on a permanent contract could run the same argument that their holiday pay should also not be subject to the 12.07% cap. Whether this would succeed remains to be seen.

This may not be the end of the matter as it may well be that the decision will be appealed to the Supreme Court. ACAS will no doubt be updating its guidance in due course.

Link to transcript

England and Wales Court of Appeal (Civil Division) Decisions

Other holiday pay articles by the authors