The Supreme Court has handed down its judgement in the case of Harpur Trust v Brazel. The judgement confirms that “part-year” workers are entitled to the same holiday entitlement as workers who work all year (5.6 weeks). The case also confirms that employers should not apply a percentage of pay (e.g. 12.07%) when calculating holiday entitlement/pay.

Who will this affect?

This has broad application for employers in all industries, especially those with term time only, casual and seasonal workers. The following fact patterns will be impacted, but others may also exist:

1. Workers (whether they are employed, agency workers, engaged via umbrella companies or “limb b” workers) who are employed or engaged on a permanent or full-year contract but who work variable/casual hours through the year including those where the business currently uses 12.07% (or another percentage method) for calculating holiday entitlement and pay. This will also potentially apply to zero hour/variable paid worker who are paid holiday based on the 12.07% multiplier.

2. Workers whose holiday pay/entitlement is pro-rated down to reflect “part year” working.

What were the facts and background of the case?

• The case involved a music teacher, Ms Brazel, at a school run by the Harpur Trust. During the term time she would work different hours each week (depending on how many pupils required lessons) and would usually teach between 10-15 hours per week during term.
• Ms Brazel was employed under a permanent zero-hours employment contract. She was treated as having taken her annual leave in three equal tranches (winter, easter and summer) during the school holidays which worked out at 1.87 weeks at a time.
• Before September 2011, the Trust would calculate her holiday pay by working out how much she had been paid during the 12 term weeks prior to the school holiday, dividing that total by 12 (to calculate an average week’s pay) and pay her 1.87 times that weekly average. This is referred to as the “Calendar Week Method” and is based on section 224 of the Employment Rights Act 1996 (which is incorporated into the Working Time Regulations at regulation 16).
• After September 2011, based on published guidance which has since been revised, the Trust changed the calculation. Ms Brazel was still treated as taking her annual leave entitlement in three equal tranches but in calculating the number of hours of holiday that she was paid for, the Trust calculated Ms Brazel’s hours worked at the end of each term, multiplied them by 12.07% and paid her the hourly rate for that number of hours. This is what the Supreme Court referred to as the “Percentage Method”.
• The reasoning for the Percentage Method was as follows: The working year is the whole year (52 weeks) minus the annual leave (5.6 weeks) equalling 46.4 weeks. 5.6 weeks is 12.07% of 46.4 weeks. The Trust therefore treated Ms Brazel as being entitled to 12.07% of her total pay for the term. In other words, the Trust treated the leave entitlement as accruing in proportion to the time Ms Brazel actually worked and not 5.6 weeks throughout the year.
• The different approach to calculating the holiday pay resulted in lower holiday pay for Ms Brazel and, as a result, she brought a claim before the Employment Tribunal for unlawful deductions from her wages by underpayment of her entitlement to holiday pay.
• The Employment Tribunal originally agreed with the Trust’s method of calculation; however, the Employment Appeal Tribunal and Court of Appeal both agreed with Ms Brazel. The Trust appealed to the Supreme Court.

What did the Supreme Court say?

• The amount of leave to which a part-year worker under a permanent contract should not be pro-rated to that of a full-time worker. Both full-time and part-year workers are entitled to 5.6 weeks’ holiday.
• This is the case even though:
  • This results in Ms Brazel (and other workers like her) being entitled to, proportionately, a greater amount of leave than she might strictly be entitled to under the EU’s Working Time Directive when compared to a full-time worker; and,
  • In some hypothetical situations put forwards by the Trust in their arguments in the Supreme Court, this approach would result in non-compliance (such as where workers increase their working hours during the course of the year).
• The Supreme Court held that employer should not use 12.07% (or any other “percentage method”) for calculating holiday entitlement and pay. Instead, employers should use the Calendar Week Method referred to above based on 5.6 weeks leave.

Views from the Deloitte Fair Pay team

• Employers should urgently review the entitlements of term-time only and other part-year workers to ensure compliance.
• Employers who have been using the 12.07% multiplier, whether that was to calculate holiday pay or holiday entitlement, should take steps now to understand the risks of non-compliance and, where appropriate, change holiday pay practices and consider whether any payment for potential underpayments is necessary. Holiday pay claims can be backdated up to two years (further in Northern Ireland) with the claim period being shorter if there is a gap of more than three months between underpayments.
• This will be particularly important in light of the proposed Single Enforcement Body which, when implemented, will have powers to enforce holiday pay compliance.
• Employers should think carefully around the circumstances in which they make use of permanent contracts for very casual labour. Using these for workers who are, in reality, only working for short periods, could result in them being entitled to more holiday than the time they spend working.
• Organisations engaging workers via umbrella companies or agencies may face additional costs and should consider the way in which those individuals are engaged and whether current contractual arrangements allow for providers to pass on costs relating to this change.
• At the same time as considering any contractual and legal changes necessary, consideration needs to be given to how they will be implemented from a systems perspective and from an operational perspective.
• In addition to this point, a broader review of holiday pay averaging should be considered as most employers we speak with are either non-compliant or are paying more than is necessary due to the complexity of the holiday pay rules.

Deloitte’s multi-disciplinary team of tax, legal and payroll & workforce management specialists are well placed to assist, with extensive experience of advising employers of holiday pay compliance.

If you wish to discuss the implications of the latest case law please do reach out to your usual contact or one of the team, below.

Kathryn Dooks - kdooks@deloitte.co.uk - 020 7303 2894

Helen Kaye - hkaye@deloitte.co.uk - 0113 292 1316

Chris Robson - christopherrobson@deloitte.co.uk - 0121 695 5958

Amy Douthwaite - adouthwaite@deloitte.co.uk - 020 7303 3486

Ben Baldwin - benbaldwin@deloitte.co.uk - 0113 292 1447

Harry Martin - harryjmartin@deloitte.co.uk - 020 7007 5736