In Harpur Trust v Brazel  UKSC 21, the Supreme Court had to decide on the correct method of calculating holiday entitlement and pay for workers who work for varying hours during only certain weeks of the year but who have a contract throughout that year (referred to as "part-year workers"). The issue was whether their entitlement should be calculated on the same principle proportionally as full-time employees (so that the weeks they do not work reduce their entitlement) or whether their leave should be calculated ignoring those weeks, which would give them an entitlement proportionally exceeding other employees.
While the case specifically relates to term time working arrangements, it could also be relevant to zero hours contracts or other atypical working arrangements in which a worker only works for part of the normal working year.
Regulations 13 and 13A of the Working Time Regulations 1998 (WTR) provide that workers are entitled to 5.6 weeks' annual leave each year. Regulation 16 of the WTR states that a worker is entitled to be paid in respect of any period of annual leave at the rate of a week's pay in respect of each week of leave. It goes on to state that sections 221 to 224 of the Employment Rights Act 1996 (ERA) apply for the purpose of determining the amount of a week's pay.
Section 224 is the relevant provision for calculating a week's pay where there are no normal working hours (as in this case). It states that the amount of a week's pay is the amount of the employee's average weekly remuneration in the period of 12 weeks immediately before the holiday. Under section 224, no account is taken of a week where no remuneration was payable by the employer; in this case, earlier weeks have to be included in order to bring the total number of weeks up to 12.
With effect from 6 April 2020, Regulation 16 has been amended so that section 224 applies as if the reference to 12 weeks is a reference to 52 weeks. However, as it was brought before that date, for the purposes of this case the relevant period was 12 weeks.
Mrs Brazel was a visiting saxophone and clarinet teacher at a school run by the Harpur Trust and worked during term time only. She worked a variable number of hours each week (depending on how many pupils needed lessons) and was paid for the hours she taught during term time. She was not required to work during school holidays. The Harpur Trust accepted that she was a worker under the WTR and was therefore entitled to 5.6 weeks of paid annual leave. She took her annual leave during school holidays when she was not required to teach. Because she was not required to work during school holidays, there were more than 5.6 weeks per year when she did not work.
Her contract of employment stated that she had no normal hours of work and there were no minimum hours of work guaranteed to her.
Before September 2011 her holiday pay for the 5.6 weeks was calculated by working out her average week's pay in accordance with section 224 of the Employment Rights Act 1996 and multiplying it by 5.6. At that time, section 224 defined a week's pay as the worker's average weekly pay in the 12 weeks ending with the start of their annual leave, ignoring any weeks in which they did not work.
After September 2011 her employer changed its method of calculating holiday pay. They calculated the hours she had worked at the end of each term, took 12.07% of that figure then paid Mrs Brazel her hourly rate for that number of hours as holiday pay. (12.07% is the proportion that annual leave of 5.6 weeks bears to the full working year of 46.4 weeks. At that time, Acas guidance recommended that holiday pay be calculated this way for casual workers but it later updated its guidance.) The Harpur Trust therefore treated Mrs Brazel as entitled to 12.07% of her pay for the term, reflecting the hours she had worked, which meant she received less holiday pay than previously.
Mrs Brazel brought an employment tribunal (ET) claim for unlawful deductions from wages by underpayment of holiday pay. The ET rejected her claim but the Employment Appeal Tribunal allowed her appeal and held that the initial method of calculation adopted by her employer was correct. The employer then appealed to the Court of Appeal and that appeal was dismissed. A further appeal was made to the Supreme Court.
In a decision that focussed on a strict interpretation of the WTR, the Supreme Court dismissed the employer's appeal. It held that the amount of leave to which a part-year worker under a permanent contract is entitled must not be pro-rated to be proportional to that of a full-time worker.
In reaching that decision, the Supreme Court noted that there was nothing in the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 to prohibit part-time workers from being treated more favourably than full-time workers. Further, the Supreme Court held that there is no provision in the WTR that states that a worker's entitlement to holiday is pro-rated according to the amount of work they do in the leave year, and no distinction is drawn in the WTR between full-time, part-time or part-year employees. The number of days on which a worker works is relevant to the amount of holiday pay they receive but does not affect their holiday entitlement.
Using 12.07% of pay in order to calculate holiday pay was rejected by the Supreme Court because it does not involve calculating an average week's pay, which is required under the WTR.
The incorporation into the WTR of the definition of an average week's pay for the purposes of determining holiday pay (including for those who work irregular hours) was a choice made by Parliament, which decided this should be calculated in accordance with a 12 week (now 52 week) reference period, ignoring weeks in which no pay is received.
The Harpur Trust had put forward various alternative ways of calculating holiday pay, which the Supreme Court rejected on the grounds that they did not comply with the WTR or the ERA and would have required employers to keep detailed records of hours worked and carry out extremely complicated calculations. In reaching that decision, the Supreme Court accepted that its conclusions could produce odd results in extreme cases but did not see that as justification for departing from the clear statutory wording.
What this means for employers
This decision will most directly impact workers without normal working hours. A part-year worker's annual leave must be calculated as 5.6 weeks, in the same way as everyone else, without a proportionate reduction being made due to the fact they work fewer weeks in the year compared to full-time and part-time workers.
Calculating holiday pay based on 12.07% of annual earnings is incorrect and should no longer be used. Instead, holiday pay for part-year workers should be calculated using the averaging method (12 weeks at the time of the claim and 52 weeks now), ignoring any weeks that have not been worked, such as school holidays. This is likely to result in higher rates of holiday pay for atypical workers.
While the case expressly dealt with an employee without normal working hours, some part-year workers may have normal working hours during the weeks in which they are working. If the way holiday is calculated for those workers results in them having less than a full 5.6 weeks' entitlement then that may also be open to challenge.
Employers should therefore check if they have any atypical workers whose holiday pay is being calculated on the basis of 12.07% of pay multiplied by 5.6 weeks or via another method that results in them having a pro rata entitlement. If so, they will need to change how they calculate holiday pay.
Employers should also review the arrangements of term time workers who work normal hours when they are at work and check that their holiday entitlement and pay are being calculated correctly.
This decision is likely to affect many employers in the education sector but it will also be relevant to other organisations who have employees working on a term-time only basis. In some cases, this may result in employees receiving less holiday pay than before but in others it will be more. We may see a flood of unlawful deductions claims from workers who have had their holiday pay calculated on the basis of 12.07% of pay and that is particularly likely in unionised workplaces.
If employers need to change their practices going forward, they will also need to address whether to make back pay payments to affected employees and, if so, over what period. Doing so will reduce the risk of claims but may also be a significant cost. If employers decide to pay back pay that may involve careful consideration of how long employees might be able to claim compensation for in an unlawful deduction from wages claim.
As a result of this judgment, employers may be more reluctant to agree a term-time only working pattern. Different contractual arrangements should be considered and may provide an alternative, such as freelance, temporary or fixed term contracts.
If you have any queries on the contents of this article or how the Supreme Court decision affects your organisation, please get in touch with your usual Womble Bond Dickinson contact.