How should employers calculate holiday pay for part-year workers?

A recent Supreme Court decision has clarified the position on how holiday pay for irregular workers on permanent contracts should be calculated. But practically, where does this leave employers and what options are available to them?

Background

Under the Working Time Regulations, workers are entitled to be paid a minimum of 5.6 weeks annual leave where they work under a permanent contract, albeit employers can pro rata this entitlement for part time workers (but not part-year workers employed under a permanent contract as discussed below).

For workers without normal working hours, a widely adopted approach for the calculation of holiday pay has been to accrue at the rate of 12.07% of hours worked. This figure is derived from 5.6 weeks being 12.07% of 46.4 weeks, with 46.4 weeks being the standard working year.

This method of calculation of holiday pay has, however, been challenged in the case of Harpur Trust v Brazel. For a summary of the facts of that case, see our earlier article: Case Update: Calculating holiday entitlement for part-year workers (shoosmiths.co.uk)

In Harpur Trust, the Supreme Court confirmed that the statutory entitlement to 5.6 weeks is not reduced on a pro-rata basis for part-year workers. Statutory annual leave entitlement is not dependant on the work carried out by the worker but is universally applicable to those employed under permanent contracts. It is therefore important to distinguish between a part-year worker and a part-time worker. A part-time worker’s 5.6 weeks holiday entitlement will translate into a proportion of a full-time worker’s equivalent entitlement. A part-year worker employed under a permanent contract, however, is entitled to the full 5.6 weeks, even if they only actually work for a small period of the year. The decision, confirming that part-year workers should not have their holiday entitlement pro-rated, has the potential to produce seemingly odd results. For example, an employee employed on a permanent part-year contract who only works one week per year would be entitled to 5.6 weeks' holiday pay.

In addition, the Supreme Court held that the percentage method of calculating holiday entitlement for part-year workers is not compliant with the Working Time Regulations 1998. The ‘calendar week method’ is instead the correct implementation of the Regulations. Although the Supreme Court acknowledged the potential for the calendar week method to produce a result whereby part-year workers are left receiving disproportionately more paid holiday as compared to full-year workers, the Court recognised that this does not itself infringe current legislation.

Part-year workers should, therefore, be paid a week’s pay for each of the 5.6 weeks to which they are entitled, and such pay should be calculated using the average pay for the 12 weeks (now 52 weeks with the reference period having been increased from 6 April 2020) proceeding the holiday being taken. This is likely to result in holiday varying form one holiday to the next. But who might this apply to and how do employers actually do this in practice?

Which workers are impacted by the decision?

The first step is for employers to identify which, if any, of their workforce could be impacted by this decision, being any permanent part-year workers who do not work consistently throughout the year but whose pay corresponds to their working hours. This would include workers with no normal working hours who are paid hourly or daily including zero-hours employees and so is likely to impact those in sectors who commonly engage part-year workers such as education, manufacturing, hospitality, retail and healthcare.

The decision will not apply to full-time workers, part-time workers with regular hours, any worker with a fixed salary or workers on a temporary contract.

How should employers calculate holiday pay now for part-year workers?

Employers using the percentage method to calculate holiday pay for workers engaged on permanent part-year contracts will now need to change their method of calculation (if to date they have been using the 12.07% method). Employers should also look to identify any shortfall in holiday pay paid to workers with irregular working patterns under the percentage method over the last two years. An audit may assist employers in establishing which of their workers this judgment could apply to and check any potentially liability for workers who could have been underpaid previously.

To comply with the Supreme Court’s decision, going forwards employers will need to look back over the 52 weeks prior to the period of holiday requested and calculate the average weekly rate of pay during that reference period, ignoring any weeks in which no pay was received. This rate of pay should then be applied to the holiday to be taken. However, for employers with a large workforce impacted by this case, this presents an administrative burden, with holiday pay potentially having to be calculated each time holiday is taken.

Alternative options employers could therefore consider are:

• Engaging part-year workers on a fixed-term contract where accrued untaken holiday pay could be paid in lieu on termination of the contract. However, care needs to be taken if successive fixed term contracts are to be used, which may give rise to a permanent contract in time.
• Specifying when periods of holiday are to be taken, in accordance with the Working Time Regulations, so that employers can control as much as possible when the holiday pay calculations need to be done.
• Paying part-year workers a fixed salary throughout the year, encompassing the intervals of non-working as well as any holiday periods taken throughout the year. This could be based on a salary reflecting anticipated working hours over the course of the year.
• Ensuring that part-year workers are given a minimum number of hours work every week of the contract so that they are no longer classed as part-year workers.
• Engaging individuals as self-employed contractors to carry-out specific tasks or work for a specified period of time. This might be a viable option if the work to be carried out is irregular and can genuinely be done on a self-employed basis.

If any of these options are implemented, employers will need to consider how best to approach the drafting of their employment contracts to reflect whatever method they chose to adopt.

Employers should also check their payroll systems (whether internal or external) to ensure that they have the functionality to calculate holiday pay in accordance with Harper.

What’s on the horizon?

Harpur Trust v Brazel leaves many questions unanswered. Further litigation is likely to follow with greater clarity being needed in particular areas. There is also scope for the government to propose amendments to the holiday pay rules under the Retained EU Law (Revocation and Reform) Bill, but only time will tell.