Holiday pay for part-year workers may need to be recalculated

The UK Supreme Court has found that a school music teacher on a zero-hours contract was entitled to holiday pay calculated on the basis of her average weekly pay in the 12 weeks worked before the leave period, rather than based on a fixed percentage of the hours she had worked during term time.

Background

Ms Brazel worked irregular hours teaching saxophone and clarinet at a school in England. She was a part-year worker, being on a permanent contract but paid at an hourly rate for the hours she spent teaching during term time.

As with all workers, she was entitled to 5.6 weeks of paid annual leave under the Working Time Regulations 1998. The calculation of her pay entitlement for these 5.6 weeks holiday resulted in a dispute with her employer which went all the way to the UK Supreme Court.

The calendar week method v the percentage method

Prior to September 2011, Ms Brazel was paid on the basis of the Calendar Week Method which involved multiplying an average week’s pay by 5.6 weeks. The value of a “week’s pay” was calculated under section 224 of the Employment Rights Act 1996 by taking her average weekly pay in the period of 12 weeks ending with the start of her leave period, ignoring any weeks in which she did not receive any pay.

From September 2011, however, the school changed its holiday pay calculation method. Rather than paying 5.6 times her average weekly pay, they added up the hours Ms Brazel had worked during the term and calculated her holiday pay entitlement using her hourly rate multiplied by 12.07% of the total hours worked (the Percentage Method). The school sought to rely on the EU “conformity principle” to argue that the annual leave of part-year workers should be pro-rated so that it is proportional to that of a full-time worker.

The change meant that Ms Brazel’s holiday pay reduced. She brought a claim for unauthorised deductions from her wages.

Supreme Court ruling

The Supreme Court favoured the Calendar Week Method, based on regulation 16 of the Working Time Regulations and section 224 of the Employment Rights Act 1996. The court found that the process of calculating a week’s pay and multiplying it by 5.6 weeks is a straightforward mechanism and should be followed as it was a choice made by Parliament. The Trust argued that applying the Calendar Week Method would produce an absurd result as Mrs Brazel (and other part-year workers) would receive holiday pay that represented a higher proportion of annual pay than either full-time employees or part-time workers who work regular hours.

The court noted these arguments but also noted that European law does not prevent a state from making a more generous provision than the “conformity principle” would produce. The legislation does not provide for pro-rating (except in respect of accrual of annual leave in year one and payments made to employees in lieu of accrued holiday entitlement on termination). The amount of leave to which a part–year worker under a permanent contract is entitled is therefore not required to be, and under domestic law must not be, pro–rated to be proportional to that of a full–time worker.

Implications of this decision

The Percentage Method is dead

The 12.07% “Percentage Method” is one that was endorsed in (now retracted) guidance from ACAS on calculating holiday pay for workers with irregular hours. The rule came about because 5.6 weeks of annual leave is 12.07% of the total working year of 46.4 weeks (52 weeks less 5.6 weeks holidays) so, applying that same proportion to the hours actually worked, holiday pay entitlement was 12.07% of the total hours worked. This effectively produced a cap of 12.07% for holiday pay as a proportion of hours actually worked in a year.

The result of this case though is that the Percentage Method is no longer an effective way for employers to pay. It does not work for anyone with an irregular working pattern and has now been rejected by the Supreme Court.

The Calendar Week Method has been endorsed

The Supreme Court came out unanimously in favour of the Calendar Week Method, based on regulation 16 of the Working Time Regulations and section 224 of the Employment Rights Act 1996 so this is how holiday pay should be calculated for permanent part-year workers.

It is important to note that, from 6 April 2020, the calculation of a week’s pay under section 224 of the Employment Rights Act 1996 uses average earnings over the preceding 52 weeks, rather than 12 weeks as it was at the time of the circumstances in this case.

This case is important but is relatively limited in scope as it only applies to permanent part-year workers and those with irregular hours who don’t work the complete year. It is most likely to affect staff in education roles who are paid during term time only or those in seasonal jobs who are retained on a permanent contract but only paid for work during limited periods. The decision has no implications for workers engaged on a series of individual contracts or part-time workers (and also likely part-year workers) who work regular hours and are paid set salaries throughout the year.

Next steps

We would encourage all employers to carry out an audit of the way that holiday pay has been calculated for part-year employees in the past. This decision is likely to trigger employee claims for back pay in circumstances where employers have used the 12.07% method of calculating holiday pay and it means that employers who have used this method need to revise their approach going forward.

Contact us

Harper Macleod’s specialist employment law team can advise you on the consequences of this court decision and guide you through the actions necessary to comply with this newly established interpretation of the law, both in dealing with any claims and ensuring that holiday pay is calculated on the correct basis from now on.