Supreme Court ruling on Holiday Pay - Harpur Trust v Brazel

An influential court ruling from the Supreme Court may change UK holiday pay for part-year workers

The Working Time Regulations continue to produce litigation relating to holidays and holiday pay. The most recent story in the saga concerns holiday entitlement for part-timers, who work irregular weeks. This is a significant judgement for any employer who employs staff on an irregular annual working pattern, such as term-time or seasonal working.

This is a Supreme Court judgment, so it is highly influential, and many employers need to change their approach to calculating holiday pay for certain employees.

In summary, the Supreme Court in Harpur Trust v Brazel holds that part-year workers (those who work irregular hours only some weeks of the year but who have a permanent contract) are entitled to the same unreduced statutory holiday as full-time workers. As such, their holiday pay should not be pro-rated to be proportional to a full time worker. This means that they may be entitled to a disproportionately high amount of paid leave when compared to a full time worker, or to a part-timer who works regular days each week.

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Holiday calculation

In the UK, ‘workers’ are entitled to 5.6 weeks of annual leave a year, as is enshrined in the Working Time Regulations 1998 (‘WTR’), during which employers must ensure proper pay. These 5.6 weeks can include bank holidays. Regulation 16 WTR and s.224 Employment Rights Act 1996 (‘ERA’) provide that the ‘Calendar Week Method’ should be followed when calculating a week’s pay.

Those of you who have followed the case law in this area in recent years will know that there have been various judgements looking at how employers should calculate a week’s pay. This may be straightforward where the employee is salaried, with no entitlement to overtime. However, as soon as the employee has variable pay, an entitlement to overtime, or earn regular commission or bonuses, then the picture becomes much more complex, and this is where the calendar week method comes in.

This method requires a week’s pay to be taken from an average of the last 52 weeks, ignoring any weeks in which pay was not received (the period was previously 12 weeks, as is noted in this case, until it was amended in 2020). The most significant factor for the purposes of understanding the Harpur Trust case is that you need 52 weeks, and can only take into account weeks in respect of which the employee received pay. So, if you have an employee who only works half a year, you will need to take into account their earnings for two years to be able to calculate their average weekly pay.

Background of the case

Mrs Brazel, the employee, is a music teacher for a school run by the Harpur Trust, the Appellant. She works irregular hours, changing each week to match the demand for music tuition from students. She is only paid for the hours that she actually works. As a schoolteacher, Harpur Trust require Mrs Brazel to take her annual leave during the school holidays in three periods - winter, spring and summer - for which 1.87 weeks of holiday pay are paid for each period.

Prior to 2011, Harpur Trust used the ‘Calendar Week Method’ to calculate holiday pay. Remember – at this time, weekly pay was calculated over a period of 12 weeks, not 52. They ignored any weeks for which she was not paid. They would then pay – three times per year - 1.87 times the weekly amount that they had calculated so as to satisfy Mrs Brazel’s entitlement to holiday pay.

However, after 2011, Harpur Trust, following advice from the ACAS guidance booklet “Holidays and Holiday Pay”, applied a new calculation method, the ‘percentage method’. This took the proportion that holiday bears on the total working year (12.07%), and uses this as the proportion of a week’s pay to be paid as holiday pay. For example, if an employee had earned a total of £1000 in the previous 12 week period then they would receive £120.70 holiday pay for that period. This new calculation method had the effect of reducing Mrs Brazel’s holiday pay and subsequently causing her to submit a claim to the Employment Tribunal for unlawful deduction from wages by way of underpayment of holiday pay.

In the Employment Tribunal, Mrs Brazel’s claim was dismissed, with the Tribunal accepting that holiday pay needed to be pro-rated to reflect the fact that she was only working during term time rather than the full working year.

This decision was subsequently overturned in the Employment Appeal Tribunal (EAT), allowing Mrs Brazel’s appeal.  This judgment was affirmed in the Court of Appeal (CA).  Both the EAT and CA held that the proper construction of the law required employers to use the ‘Calendar Week Method’, not the percentage method (in spite of the percentage method being popular with many employers, and being endorsed by ACAS).

The extension of the reference period from 12 weeks to 52 weeks.

It is unlikely that the judgement in Harpur Trust would have been so significant had not the reference period for calculating a week’s pay not been extended to 52 weeks. At 12 weeks, it is almost always going to be the case that a period of holiday (for which holiday pay needed to be calculated) would have been preceded by a period during which the employee worked. However, this is not the case with a 52 week reference period, which may require the employer to discount significant periods during which there were no earnings, and instead, look further back into the past to find working weeks. It is this aspect that has the effect of disproportionately benefitting an employee with irregular weekly working patterns.

For example, an employee earns £1000 per week when they work. They do not work during the school holidays. Their annual pay, therefore, is £37,000. If we calculate their holiday at 31 December, then they are entitled to £5,600 holiday pay. This is the same as a full timer, also earning £1,000 per week, but working 52 weeks in a year.

Consider a part timer who works 4 days per week at an FTE of £1,000 per week. Their pro-rated pay would be £41,600. However, their holiday pay would only be £4,480. Therefore even though they are working more hours than the first employee, and earning the same rate of pay, they are entitled to significantly less holiday pay.

On any analysis, this is an anomaly. The question for the Supreme Court was whether the EAT and CA were right to bake this anomaly into the interpretation of the legislation.      

Judgement

Yes, said the Supreme Court. In spite of this anomaly, the EAT and CA had made the right decision.

Affirming the Court of Appeal’s judgement, and dismissing Harpur Trust’s appeal, Lady Rose and Lady Arden gave the leading opinion that the WTR could make a more generous provision to part-year workers in the calculation of holiday pay. This gives part-year workers practically the same holiday pay as full time workers despite working proportionally less over the year.

In response to Harpur Trust’s assertion that such a result was ‘absurd’, the Supreme Court posited that a slight favouring of part-year workers could not properly justify ‘the wholesale revision of the statutory scheme’ and alternatives provided by Harpur Trust were both directly contrary to the statutory method present in the WTR, required complicated calculations, and required workers and employers to keep detailed records of hours in contravention to the principles of EU Directives (upon which the WTR remains based, in spite of Brexit) to not impose administrative, financial or legal constraints in a way which would hold back the creation and development of small and medium-sized undertakings.

What this decision means for employers

Employers who have term time or casual workers should review the methods used to calculate holiday pay.  Many employers still rely upon the ACAS guidance. Whilst this is not prohibited, there is a real risk that it leads to an underpayment of holiday pay which can be challenged at a later date.  Many employers will have to look at undertaking a case-by-case approach to calculation, which may be cumbersome.  Finally, if an employer does discover holiday pay has been underpaid, it may be necessary to reimburse such workers with back pay in order to correct the deduction of wages.

Our Employment Team has a wealth of experience guiding employers through organisational change and contractual variation processes. For further advice and assistance, please contact the team directly via Employmentexpert@prettys.co.uk.

Expert
Matthew Cole
Partner
Jamie Mattocks
Paralegal