Calculating holiday pay for part-year workers engaged on permanent contracts

In the case of The Harpur Trust v Brazel [2019], the Court of Appeal has held that permanent staff who only work part of the year (including, for example, term-time workers) should receive 5.6 weeks’ holiday pay, calculated using the average rate of pay over the previous 12 week period. Their entitlement should not be calculated on a pro-rata basis at the rate of 12.07%.

Facts

Mrs Brazel was a part-time music teacher who was engaged on a permanent zero-hours contract. She worked during term times only and was paid at an agreed hourly rate each month based on the hours worked in the previous month.

Mrs Brazel’s employment contract entitled her to 5.6 weeks’ annual leave, which she was required to take during the school holidays whilst not teaching. The school calculated her holiday pay at 12.07% of hours worked in a term (12.07% being reached by dividing 5.6 (the full-time equivalent number of weeks’ leave) by 46.4 (the total number of weeks in a year less the 5.6 weeks’ statutory leave)) in line with the standard approach for casual or irregular-hours workers and Acas guidance. As school holidays are far longer than 5.6 weeks’ leave, it was agreed that her holiday pay would be paid in three instalments at the end of each term. 

Ms Brazel subsequently brought an unlawful deduction from wages claim on the basis that she had been underpaid for her holiday. She argued that as the school year varied between 32 and 35 weeks a year, calculating her holiday pay on a pro rata basis at the rate of 12.07% of her annual pay resulted in her entitlement being lower than if it had been calculated using her average weekly earnings over the 12 week period immediately prior to holiday being taken - the method for calculating holiday pay set out in the Working Time Regulations 1998 (“WTR”) and the Employment Rights Act 1996 (“ERA”) for workers with no normal working hours.

The Employment Tribunal and Employment Appeal Tribunal decisions

The Employment Tribunal agreed with the School and held that holiday entitlement should be pro-rated whenever an employee works less than a standard 46.4 week working year to reflect the weeks actually worked. It held that this was necessary so as not to treat full-time workers less favourably and to avoid a ‘windfall’ for term-time only workers. Consequently, it held that Mrs Brazel’s entitlement of 5.6 weeks’ holiday pay should be pro-rated at the rate of 12.07% of annual pay.

Ms Brazel appealed to the Employment Appeal Tribunal (“EAT”), which overturned the Employment Tribunal’s decision. The EAT held that there was no legal requirement in the U.K. to pro-rate a permanent part-year worker's holiday entitlement in this way, and that Ms Brazel’s holiday pay should have been calculated using the 12-week averaging method set out in the WTR and ERA. Applying this averaging method resulted in her recalculated holiday pay equating to 17.5% of her annual pay rather than 12.07%.

Court of Appeal decision

The School subsequently appealed to the Court of Appeal, which dismissed the School’s appeal. In doing so, it agreed with the EAT’s determination that there was no legal requirement in the U.K. to pro-rate holiday entitlement for employees working part of the year only and that if the courts were to build in a pro-rating requirement this would mean substituting an entirely different scheme.  

The Court of Appeal recognised that the 12 week averaging method could, in theory, result in employees on permanent contracts who are only required to work part of the year receiving more for their holiday than those who work full time, but noted that this was not obviously unfair nor was it unlawful (the Court of Appeal considered an extreme example of a permanent employee who worked for only one week of the year and who was paid £1,000 for that week then be entitled to 5.6 weeks' notional annual leave amounting to £5,600). The Court of Appeal noted, however, that it would be unusual for someone with such a working pattern to be on a permanent contract and that, in any event, such anomalies could not lead to a different interpretation of the legislative requirements. 

What are the implications for employers?

It is highly likely that many schools and colleges with term-time only employees apply the 12.07% method to calculate holiday pay and this will now have to be reviewed given the Court of Appeal’s ruling. Note that it is not just teachers who will be affected in this way but all workers engaged on permanent contracts who only work part of the year, so-called ‘part-year workers’.

All employers should review their workforces carefully and determine whether they engage workers who may be caught by this decision. Where they do and holiday pay is currently calculated in respect of these workers on a pro rata basis, they will need to revisit their approach and consider using the 12-week averaging method going forward.  

It should be noted that new regulations due to come into force in April 2020 will change the 12 week reference period for calculating holiday pay for all workers to 52 weeks to ensure that those with variable hours will not be disadvantaged by having to take holiday at a quieter (and so lower paid) time of the year.

Affected employers are open to claims for unlawful deductions from wages covering the previous two year period, although any holiday pay that has been paid will be set off against any amount claimed. Where an employer has a large number of employees working under a similar arrangement, however, this may still represent a significant financial cost. An assessment of the employer’s potential exposure to such claims should therefore be carried out and consideration be given as to whether changes ought to be made to existing holiday pay calculations. 

It remains to be seen whether the School will appeal this judgment to the Supreme Court. In the meantime, however, the Court of Appeal’s decision is binding on the lower courts and tribunals, and so should be followed where the same facts apply.However, employers will have to take a pragmatic approach and we expect that many will continue to use the 12.07% approach to calculating the holiday entitlement until further case law provides more clarity.