Holiday entitlement of permanent part year workers should not be pro-rated

In this Briefing we consider the impact this decision has on employers, particularly those currently operating the 12.07% method for calculating holiday pay.

What was the case about?

Mrs Brazel is engaged on a permanent contract by the Harpur Trust (the Trust). She works at a school as a visiting music teacher, working term time only and different hours each week. She is paid only for the hours that she teaches, and has no normal or minimum guaranteed hours of work. She’s entitled to 5.6 weeks’ paid leave and has always been treated as having taken her annual leave in three equal tranches (of 1.87 weeks’) - in the winter, spring and summer school holidays.

Prior to September 2011, Mrs Brazel received a full 5.6 weeks’ holiday paid in accordance with a calculation of holiday pay called ‘the calendar week method’: a formula set out in section 224 of the Employment Rights Act 1996 (article 8 of the Employment Rights (Northern Ireland) Order 1996 for those in Northern Ireland) which calculates holiday pay by averaging weekly pay over a statutory reference period, discounting any weeks in which work was not undertaken.  At the time the statutory reference period was 12 weeks but since April 2020 the statutory reference period has been 52 weeks.

From September 2011, Mrs Brazel’s holiday pay calculation changed and was based on 12.07% of her earnings. The 12.07% calculation has been used by many employers to get around the headache of working out holiday pay for people who work irregular patterns as it is the proportion that 5.6 weeks’ annual leave bears to the working year - the standard working year is 46.4 weeks (that is, 52 weeks less the statutory 5.6 weeks holiday entitlement) and 5.6 weeks is 12.07% of 46.4 weeks.  

The result was that, from September 2011, Mrs Brazel received less leave, and therefore less pay. This was because the ‘gaps’ in her earnings during the holidays reduced her overall holiday pay, effectively pro-rating her holiday entitlement comparable with a worker who worked the full year. Mrs Brazel claimed unlawful deductions from her wages by underpayment of her holiday pay, arguing that she was entitled to a full 5.6 weeks’ pay calculated according to ‘the calendar week method.’

The Trust argued that ‘the calendar week method’ failed properly to afford workers the rights conferred by the European Working Time Directive (WTD), which required that the amount of leave should be pro-rated to reflect the amount of time actually spent working during the annual leave year. 

What did the Supreme Court decide?

The Supreme Court held that correct construction of the Working Time Regulations (WTRs) was to use ‘the calendar week method’ and pay a full 5.6 weeks’ holiday.

Even though it was acknowledged that this effectively meant that Mrs Brazel would get more holiday leave and pay pro rata than a part time employee who worked the full calendar year (in the sense that pay for her annual leave would be a higher percentage of her total annual pay than it would be for a full-time worker), such a position was not inconsistent or contrary to the provisions of the WTD or the WTRs. The Court said there’s nothing in law to prevent part-year workers on permanent contracts from being treated more favourably than others.

It is important to note that Mrs Brazel is engaged under somewhat unusual contractual arrangements: she has an overarching permanent contract with the Trust and is only required to work on an ad hoc basis, during term-term. This is different from ‘standard’ casual worker arrangements where there is commonly no overarching contract and workers are engaged under a series of short term contracts.

What are the implications for employers?

It is clear that, following Brazel, every worker under an overarching permanent contract is entitled to 5.6 calendar weeks’ leave whether they work full time, part-time or part-year. Where such workers do not have normal hours, pay in respect of their leave must be calculated in accordance with the formula for a week’s pay set out in s.224 of the Employment Rights Act 1996 (article 8 of the Employment Rights (Northern Ireland) Order 1996), and must not be calculated using the 12.07% method. 

However, the wider practical implications of this judgment are less clear: which workers will be affected by this judgment and what should employers do in response?

Which workers will be affected by this judgment?

Whilst a lot of the commentary has focussed on the education sector, the upshot is that the case potentially affects all casual workers with no normal working hours who are on permanent contracts. Even where these workers work fewer than 46.4 weeks a year, employers must nonetheless provide 5.6 weeks of holiday. 

In fact, the greater the number of non-working weeks, the greater their holiday entitlement will be as a percentage of annual working time and earnings.

However, in practical terms this case will not impact:

1. Workers with normal part time hours – such as those working 3 days a week. Whilst these workers will be entitled to 5.6 calendar weeks' leave, this will be calculated on their normal rate of weekly pay, i.e. 3 days per week.

2. Workers working regular salaried hours, or those whose salary is annualised and paid in 12 equal monthly instalments, because they receive the same pay during weeks of holiday as during working time and there are no ‘gaps’ in their earnings. 

But what about other types of workers, including casual workers, who are not on permanent contracts?

The Supreme Court was only required to determine the position for the slightly unusual circumstances of Mrs Brazel i.e. a part-year worker on a permanent contract. Unlike most casual workers, Mrs Brazel had to have an overarching permanent contract with the Trust because of the need for DBS checks to work in the school.  So the correct method for calculating holiday pay for those who are not on permanent contracts and who work on an ad hoc / casual basis, may be the subject of future litigation. However, we expect that where it is clear that the casual worker is not on a permanent contract, and each time they work it is a separate ‘assignment’, then the pro-rating provisions in the WTR will apply.  This means that leave entitlement can be pro-rated based on the proportion of the leave year that has elapsed. 

What should employers do in response?

Employers with workers who work part of the year but who are under contract for the whole year, or those using the 12.07% method for casual workers on permanent contracts, may wish to review their contracts and consider their options to avoid the risk of future claims.

Whilst some employers may choose to continue with the 12.07% method in respect of casual workers who are not on permanent contracts, it would be timely to review this practice.  It is notable that ACAS decided to remove its guidance on the 12.07% method entirely when Mrs Brazel appealed to the Supreme Court, and the BEIS guidance (here) contains no reference to any percentage method. 

Employers may also wish to consider whether to move away from permanent contracts. The burden of additional holiday pay – and the risks of underpaying – are greater when workers are under contract but not working. As such, they may wish to consider:

• ensuring workers are given at least some work every week when they are not taking annual leave; or
• engaging workers on fixed term contracts, rather than umbrella contracts. At the end of the fixed term the worker could be paid any accrued but untaken holiday. However, employers should be mindful of the risk that successive fixed term contracts might become a permanent contract.

Read the case here.

Contributors: Siobhan Fitzgerald, Sarah Maddock and Catherine Roylance.

For further news and updates on employment law developments as they happen, please follow our specialist Employment Law Twitter Feed @TLT_Employment and subscribe to our Employment Law Focus podcast – the latest episode, on gender equality issues at work is available Employment law focus: An update on gender equality issues at work - TLT LLP.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.