The Supreme Court has today ruled that holiday entitlement and pay for workers on permanent contracts should not be pro-rated to reflect that they work on a part-year basis.
ISSUE / BACKGROUND
This case concerns the calculation of annual leave and holiday pay entitlements for workers who work for varying hours during only certain weeks of the year but have a contract throughout that year (“part-year workers”).
Under the Working Time Regulations (“WTR”), workers in Great Britain have a right to a minimum of 5.6 weeks’ annual leave and are entitled to be paid at the rate of a week’s pay in respect of this leave. Holiday pay for workers who do not have normal working hours should, under the WTR, be based on average weekly pay during the reference period immediately before the start of the leave. (The reference period at the relevant time in Ms Brazel’s case was 12 weeks. This changed with effect from April 2020 and is now 52 weeks.) In calculating the average weekly pay the Employment Rights Act (“ERA”) states that you should ignore any weeks in which the worker did not receive any pay (The Supreme Court referred to this as “the Calendar Week Method”).
Before this case the most common approach to establishing holiday entitlement for permanent employees who do not work for the whole year and are paid only for the hours they work, was to pro-rate and cap holiday entitlement at 12.07% of annualised hours. This is based on the premise that statutory annual entitlement of 5.6 weeks represents 12.07% of a working year of 46.4 weeks (i.e. 52 weeks minus 5.6 weeks). (We will refer to this as the “Percentage Method”).
FACTS
Mrs Brazel is a visiting music teacher who works at a school run by the Harpur Trust (“the Trust”). She is engaged on a permanent zero hours contract to work during term times and does not work full-time or for the whole year. She is only paid for the work that she performs, which is typically between 20 and 30 half-hour lessons a week during school term time. During school holidays she gives no lessons, although her contract continued through the year. The school year varied between 32 and 35 weeks. Mrs Brazel is entitled to 5.6 weeks’ annual paid leave, which she is required to take during school holidays.
Before September 2011, Ms Brazel’s holiday pay for the 5.6 weeks was determined by calculating her average week’s pay in accordance with the Calendar Week Method and multiplying that by 5.6.
In 2011, in line with ACAS guidance at the time, the Trust altered the manner in which it calculated the amount of this holiday pay, which resulted in Mrs Brazel receiving less holiday pay. The Trust made three annual payments in respect of her leave in April, August and December and using the Percentage Method calculated her holiday entitlement at 12.07% of her earnings in the preceding term.
Mrs Brazel brought an employment tribunal claim, arguing that the Percentage Method meant she was underpaid and does not bear any relation to the method of calculation prescribed by the WTR. She argued that her holiday entitlement should be based on her average earnings over the 12 week period immediately before holiday was taken. The employment tribunal dismissed her claim accepting the Trust’s argument that pro-rating is important to ensure full time workers are not treated less favourably and/or to avoid a “windfall” for term-time only workers who, on Mrs Brazel’s calculation, would receive a higher percentage of annual earnings as holiday pay than an employee who worked throughout the year.
Mrs Brazel appealed to the EAT which upheld her appeal. The Court of Appeal and now the Supreme Court agreed with the EAT.
The Supreme Court, in rejecting the Trust’s appeal, confirmed that the Calendar Week Method is the correct approach for permanent “part-year” workers - employers should assess a week’s pay based on the average weekly pay for the 12 (now 52) weeks before the first day of the relevant holiday, ignoring weeks not worked, and multiply this by 5.6.
In the Supreme Court, the Trust had argued that under EU case law the minimum entitlement to annual leave prescribed by the Working Time Directive (from which the WTR is derived) is calculated by reference to work actually carried out. However, the Supreme Court stated that the Directive does not prevent a more generous provision being made by domestic law.
The Trust also suggested two alternative methods for calculating holiday pay but they were rejected by the Supreme Court, stating that aspects of these methods were directly contrary to the statutory method set out in the WTR. It also said the methods would require employers to keep detailed records of every hour worked, even if employees were not paid an hourly rate.
The Supreme Court acknowledged that the Calendar Meek Method slightly favoured workers with a highly atypical work pattern as they may receive holiday pay representing a higher proportion of annual pay than FT or PT workers working regular hours. However, they said this result is compliant with the WTR and EU law. It is also not “so absurd” as to justify the wholesale revision of the statutory scheme, which the alternative methods of calculation put forward by the Trust would require.
WHAT DOES THIS MEAN FOR EMPLOYERS?
This is a significant and disappointing judgment for employers of part-year permanent workers, not just employers in the education sector. The Supreme Court did point out that the calculation of holiday pay set out in the WTR and the ERA was a policy choice made by Parliament, therefore it may become a candidate for legislative reform. However, in the meantime, employers of part-year workers should review their approach to holiday entitlement for these workers to assess whether their approach should change.
