Holiday pay for “part-year” workers - do you need to review your approach? |
Harpur Trust v Brazel

The long awaited judgment by the Supreme Court in the Harpur Trust v Brazel case was finally handed down in July to confirm earlier rulings that employees who work for part of the year, such as term-time workers, are entitled to the same holiday pay as colleagues who work all year. As such, there is now final clarity around the complex issue of calculating holidays for “part-year” workers with irregular hours.

It is a decision that is likely to require many employers, across a variety of sectors, to consider carefully how they engage employees and workers, and how their holiday pay is calculated.

We have put together some brief audit questions at the end of this article which we strongly advise that you complete, for you to consider whether your organisation needs to take advice now.

Background to the case

Mrs Brazel, a visiting music teacher at Bedford Girls School, was employed by the trust on a zero hours contract, and generally worked around 32 weeks a year. She contended that she lost out on holiday pay after the trust changed the way it paid visiting music teachers, by calculating her earnings at the end of each term and paying her 12.07% of that figure by way of holiday pay; the effect of which being that she received a pro-rata amount of the statutory 5.6 weeks’ holiday entitlement.

This approach was in accordance with the method for calculating casual workers’ holiday pay that had been recommended by ACAS (though their guidance has now been rewritten). The figure of 12.07% is derived from 5.6/46.4 where 46.4 is the number of working weeks in the year when 5.6 (the annual statutory entitlement under the Working Time Regulations 1998) is deducted from 52 weeks (which the Supreme Court called the “percentage method”).

Mrs Brazel believed her holiday pay should be calculated using her average earnings over a 12 week period and not pro-rated, whereas the trust began calculating her earnings at the end of each term. They then calculated 12.07% of that figure, before paying her normal hourly rate for that number of hours as holiday pay.

She claimed that this method was not compliant with the Working Time Regulations, believing that holiday pay should be calculated by taking the average weekly remuneration for the 12 weeks prior to the calculation date, ignoring any weeks when no work was done (the “calendar week method”).

In 2015 when she first brought her claim, an employment tribunal dismissed her case, ruling that the Harpur Trust had applied the correct method of calculation.

However, it was overturned by the Employment Appeal Tribunal who ruled in Brazel’s favour. Following a further appeal to the Court of Appeal in 2019 it was found that the Working Time Regulations did not permit leave for term-time workers to be reduced pro-rata and re-eforced that holiday pay should be calculated using the calendar week method, i.e.  their average earnings over a 12 week period (as it was then).

This line has now been followed by the Supreme Court, given their unanimous ruling that she should not have had her statutory holiday entitlement pro-rated and, consequently, she should receive the same holiday pay and entitlement as staff who work all year round.

In doing so the Supreme Court set out multiple problems with the proposed alternative calculation methods advanced by the trust, stating that they were directly contrary to statutory methods set out in the Working Times Regulations. They said those methods would require employers to keep detailed records of every hour worked even if employees were not paid an hourly rate.

Note that this decision only relates to permanent part-year workers; It does not apply to casual or non-permanent (i.e. fixed term) workers. However, there is a risk that spin-off litigation may arise under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 if employees engaged under fixed term contracts are treated less favourably than permanent employees with regards to holiday, where such difference in treatment cannot be objectively justified.

What this means for employers

Employers now need to follow this calendar week approach endorsed by the Supreme Court in order to ensure they calculate holiday pay correctly. However, they should note that with effect from 6 April 2020, the calculation of a week’s pay under Section 224 of the Employment Rights Act 1996 involves taking average earnings over the preceding 52 weeks (rather than the preceding 12 weeks as it was at the time of Mrs Brazel’s claim), ignoring any weeks when no work was done.

The Supreme Court acknowledged that their interpretation did mean that “part year” workers would receive a more generous entitlement than full-time workers, but that this does not infringe either the Working Time Directive or the EU Part-Time Work Directive. Their view was that a slight favouring of workers with a highly atypical work pattern was not so absurd as to justify the whole scale revision of the statutory scheme, which the trust’s alternative methods would require.

To date, many employers have not taken any action as regards their own calculation of holiday pay, instead preferring to “wait and see”. However, with the Supreme Court’s decision being the highest appellate authority, then this could result in a significant financial burden on many employers, particularly those in the education sector, who will have to assess their historic liability and consider making back payments.

There is much criticism of this decision with allegations of inequity for full-year workers, as well as part-time workers who work the same number of hours in total as a part-year worker, but spread across the whole year.

It may result in many employers analysing and altering their current usage of permanent contracts for certain types of workers. Employers will need to review their own arrangements and update accordingly, including ensuring that they have clarity as to when part-year workers take their holiday each year so that the 52 week calculation can be made.

What is the potential liability?

There is a risk of back-pay liability for those staff that have been paid holiday pay using the percentage method where that has resulted in an underpayment.

Affected employees could bring an unlawful deductions from wages claim to an employment tribunal to seek reimbursement of the underpayment (i.e. the difference between the pro-rata holiday pay they received and the full 5.6 weeks holiday pay they were entitled to). A claim must be brought within three months of the deduction being made, or the most recent deduction in a series of deductions.

Once the holiday pay position is rectified, and staff are paid the correct rate of holiday pay, the claim effectively crystallises. The affected employees then have three months from this date to bring their claim. There will be no further liability for an employer once the calculation of holiday pay is legally compliant and as a result, employers will know their total liability at this point.

Since 2015, there has been a two-year backstop on liability. This means that affected employees can only bring a claim in respect of the underpayment of holiday pay they have received in the two years prior to them issuing a claim, even if the underpayment has gone on for much longer.  This limits liability considerably, particularly for long serving members of staff.

What do employers need to do now?

In light of this decision we advise that you undertake a holiday pay audit as soon as possible to consider what impact (if any) the Brazel judgment has on your workforce.

We have prepared the following questions to assist in considering the issues:

1. Do you engage any workers that work irregular hours or that only work part of the year?If yes:
2. Do you currently employ these workers under permanent (rather than fixed term) contracts?If yes:
   
3. Are these workers entitled to less than 5.6 weeks holiday per annum? (for example, where it is pro-rated based on hours worked)
4. Do you use the percentage method to calculate holiday pay for these workers (whether at a rate of 12.07% or otherwise)?

If the majority of your answers to the above questions are, ‘yes’, it is imperative that you take legal advice regarding the impact of the Brazel decision. We can support with providing tailored legal advice for your specific workforce, including different categories of affected employees.

We’re here to help

If the outcome of your audit is that you do have a liability because of the Brazel decision, we can assist with considering strategy for handling that liability, including assisting you with negotiations or responding to claims for unpaid holiday pay. We are also be happy to undertake these negotiations through ACAS on your behalf, if it reaches that stage.

We can also have a commercial discussion with you about changing the way you pay holiday pay going forward, or how best to engage your part year / casual workers in the future with a view to, wherever possible, minimising the impact of the Brazel decision for your organisation. This could include preparing or amending template contracts or supporting you with a restructuring exercise to change the terms and conditions of employment with respect to holiday pay / entitlement for existing affected staff.

Holiday pay arrangements for atypical workers can be tricky, and given the recent changes, it is important to ensure that you are getting things right. If you have any further questions, or wish to seek clarification on any of the above, please do contact one of the team.