Government consultation on calculating holiday entitlement for part year workers

What is the current position?

The rules for calculating holiday pay for ‘part year’ and ‘irregular hours’ workers were recently confirmed by the Supreme Court in theHarpur Trust v Brazelcase.  Whilst the case may be legally correct, it has had a number of bizarre results and unintended consequences. 

• All workers must receive at least 5.6 weeks holiday.
  
  
• Holiday entitlement for ‘part year’ workers and workers with ‘irregular hours’ is calculated in accordance with a statutory formula.  Holiday entitlement is calculated by taking an average looking back over a rolling 52 weeks starting with the week before the week the holiday is taken.  Any week not worked is skipped so that the 52 weeks only takes into account weeksactuallyworked.  If a week is skipped an additional earlier week is brought into the calculation until there are 52 weeks (going back to a maximum of 104 weeks). Special rules apply in the first year and last year of employment.  This can be very complicated to calculate.

• This formula leads to various, sometimes bizarre, consequences:

- One consequence of skipping weeks not worked is that a ‘part year’ worker (on a permanent or zero hours contract) or an ‘irregular hours’ worker could be entitled to proportionately more holiday than, say, a comparable full time or part time worker with fixed hours through the year. For example, in the Harpur Trust case the holiday pay for the employee concerned was calculated to be 17.5% of her annual pay.

- The amount of holiday entitlement can be totally different to the actual hours being worked (or expected to be worked) in the current holiday year. Taking into account the hours worked in the previous worked 52 weeks could involve looking back over multiple holiday years.

- It can be very difficult, in some cases impossible, to calculate the holiday entitlement that an irregular hours worker is entitled to in advance.

- The precise amount of holiday entitlement the irregular hours worker is entitled to can vary depending upon when they chose to take that holiday.

• The statutory formula is also expressed in ‘weeks’. It can be exceptionally difficult to convert this into anything meaningful for an ‘irregular hours’ worker such as days or hours.

• The previously very common practice of calculating holiday entitlement using a formula of 12.07% of hours actually worked was criticised as being legally incorrect.

• As a consequence there has been a growth in some fairly complicated legal arrangements to avoid/mitigate against the risk or additional costs, for example an increase in employing people on short ‘assignment’ contracts rather than on a permanent rolling contract. We have even seen some commentators recommending employers outsource the problem and resort to using agency workers rather than employee irregular hours workers directly. We are aware of yet further litigation on the issue pending - in particular whether the decision in the Harpur Trust case might be relevant to other categories of worker.

What is the Government proposing?

The Government is proposing a dramatic simplification of the current rules to calculate holiday entitlement – i.e. how many days/hours holiday a ‘part year’ or ‘irregular hours’ worker is entitled to.  

However please note the Government is not proposing to change the rules to calculate how much pay a worker is entitled to receive for each day/hour taken as holiday.  The existing rules would still apply to pay (i.e. looking back over a rolling 52 weeks and skipping any unworked weeks). 

• Holiday entitlement for ‘part year’ employees would be pro-rated to reflect the proportion of the holiday year actually worked. The intention is that they should receive the same holiday entitlement as a part time worker working the same total number of hours but spread across the full holiday year.

• The formula for calculating holiday entitlement would be simplified. Holiday entitlement would be calculated on the basis of the hours worked in a 52 week reference period (so no need to skip weeks not worked and look back at further weeks). The Government would also expressly allow the use of the 12.07% formula to calculate holiday entitlement. (Weeks without work are however still to be excluded in calculating their average weekly pay – see below).

- The Government recognises that their suggested approach may give employer’s an incentive to offer a worker a small number of hours in a week (instead of offering no work at all). For example, giving a worker a single hour of work would mean the week counted towards the holiday entitlement calculation, reducing the worker’s total holiday entitlement and would also count towards the calculation of holiday pay.

- However the Government feel that their proposed approach is fairer and simpler for employers to administer.

• In addition, to simplify the calculation further, the Government proposes to remove the current requirement to calculate holiday based on a rolling 52 week period (which can potentially mean that the actual amount of holiday varies depending upon when the holiday is taken). Instead a fixed 52 week period is proposed based on the 52 weeks prior to the start of the current holiday year. This would mean that the worker’s holiday entitlement could be calculated in hours at the outset of each new holiday year.

- A special rule would apply in the first year of employment and holiday entitlement would accrue from month to month.

• In other words holiday entitlement would be calculated as follows: 

In year one:   Monthly holiday entitlement (in hours) = 12.07% of hours worked in previous month

Thereafter:    Annual holiday entitlement (in hours) = 12.07% of total hours worked over the 52 week reference period

• There would also be a simple formula to calculate a standard average working day so that each day taken as holiday would be paid on the basis of that standard average (it is not clear how this formula would work).

• Employers would be required to keep records of hours worked.

• As mentioned above, the Government is not proposing to change the formula to calculate how much pay a worker is due. The existing formula (taking an average over the previous 52 weeks and skipping any unworked weeks) will still apply to pay.

What is the Government seeking views on?

Essentially the Government is asking for views on:

• How are people currently calculating holiday pay for part year and irregular hours workers?

• Whether people agree with the proposal to exclude weeks that are not worked from the calculation of holiday entitlement?

• Whether people agree with the proposal to adopt a fixed 52 week period to calculate holiday pay based on the previous holiday year (rather than use a rolling 52 week period)?

• Whether people agree with the proposals to deal with holiday entitlement in year one?

• Whether people agree with the proposal to adopt a simple formula for calculating an average day’s holiday?

• Whether the information people already keep would be sufficient to calculate holiday entitlement (or whether it would involve any additional requirement or expense)

What this means for employers?

The Supreme Court decision in Harper left employers in a difficult position and gave part year workers a windfall. The ideas in this consultation paper would make calculating holiday due easier.

We will be submitting a response to the consultation and are collating views from our clients and contacts to inform that response.