Landmark ruling | Supreme Court decision on holiday pay will have huge implications for HR

Supreme Court decision on holiday pay will have huge implications for HR

A court has passed a landmark legal ruling declaring that employees who only work for part of the year, such as term-time workers, are entitled to the same holiday pay as colleagues working all year.

Following a seven-year legal battle, the Supreme Court announced its long-awaited decision in the landmark case of Harpur Trust v Brazel on Wednesday, July 20, 2022.

The case focussed on the issue of whether a worker’s right to paid annual leave is accumulated according to their working pattern, or if it should be pro-rated to reflect the fact that they don’t work for a full year.

Employment law experts have said the ruling has definitively answered how employers calculate holiday pay for permanent workers with no set hours such as ad-hoc, zero hours or term time workers, and is set to have huge implications for the HR function.

Harpur Trust v Brazel: A recap

The Harpur Trust v Brazel case was first brought before an Employment Tribunal in 2015.

The claimant, Brazel, was a “visiting music teacher” with no set working hours, employed under a permanent contract of employment.

Typically, the school year comprised 32 weeks; Brazel wasn’t required to work during the school holidays and no part of them were expressly designated as her statutory holiday entitlement.

As per its policy, the Trust worked out Brazel’s holiday pay by establishing her earnings at the end of a term, calculating 12.07% of that figure, and then dividing it by three (reflective of the three school terms).

Consequently, Brazel brought a claim for unlawful deduction from wages. She argued the Trust’s method meant she received less in holiday pay than she was due under the Working Time Regulation (WTR), and that there was nothing in the WTR to say that holidays for part-year workers should be subject to a pro-rata reduction.

At first instance, the Employment Tribunal dismissed her claim. It held that applying the 12.07% formula gave Brazel the pro-rated equivalent of a full-year worker.

The case continued through the tribunal system; Brazel appealed to the employment appeal tribunal (EAT) and was successful, and the Trust subsequently appealed to the Court of Appeal.

The core issue to be determined was whether the calculation of the Brazel’s holiday entitlement or holiday pay should be pro-rated to that of a full-year worker in order to reflect the fact that she does not work throughout the year.

The Trust certainly thought so. It argued that part-year workers’ entitlement to leave accrued in step with hours worked, and that individuals like Brazel should receive less than a full year’s entitlement otherwise they received a windfall.

Indeed, Brazel’s proposed method of calculation – explained in more detail here – would mean she received proportionally more in holiday pay than a full-year worker, equivalent to 17.5% of hours worked as opposed to 12.07%.

The Court of Appeal accepted that not applying a pro-ration did produce peculiar results. For instance, it would mean that an individual on a permanent contract who only worked for one week would be entitled to receive 5.6 weeks of leave and pay. Still, that didn’t deter the Court from finding in Brazel’s favour.

It felt that these odd results would be rare given that most workers wouldn’t be permanently employed if they were only required to work one week. Further, it didn’t agree with the Trust that it was unfair to place Brazel and others like her at an advantage when compared to full-year workers given that both were permanent workers and her holiday pay would vary according to her actual working pattern.

Why does this ruling matter?

This decision not only impacts employers in the education sector (Brazel is a music teacher) – but any employer who engages workers who do not work the full year under a zero hours contract.

The math: Full-year versus part-year workers

The WTR give workers the right to 5.6 weeks’ holiday per year – that is every 52 weeks.

For ad-hoc, zero hours and term-time workers, it’s long been common practice for employers to calculate holiday pay as 12.07% of hours worked.

This calculation comes from taking the 52 weeks in a year and subtracting the statutory 5.6 weeks to give 46.4 actual working weeks. From there, 5.6 weeks’ holiday out of 46.4 possible working weeks works out at 12.07% of hours worked.

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Boiling it down, this means for every hour worked, roughly seven minutes of holiday is accrued.

The problem with using this ‘percentage of time worked’ approach for part-year workers is that when no hours are worked in a week, no holiday is accrued, so accrual sometimes falls short of the statutory minimum entitlement under the WTR.

This is particularly problematic where there are whole weeks in which no work is done, as is the case for sessional workers such as teachers.

Employers 'need to immediately change'

Commenting on the Supreme Court’s decision, Lesley Rennie, Senior Employment Solicitor at WorkNest, told HR Grapevine: “This ruling means many employers will need to immediately change their holiday pay practices.

"This includes those who employ permanent zero hours, ad-hoc or term- time workers, have applied the 12.07% formula to calculate holiday accrual and who have either waited for the finality provided by the Supreme Court’s decision or who have, up until now, been unaware of this case. The change is required to prevent any underpayment of holiday going forward and to mitigate the risk of claims from employees arising in the future.

“But that is not all. employers will also need to assess their historic liability and make a judgement call on whether to make a back-payment in respect of any holiday pay underpayments or to bear the risk of a claim."

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Rennie went on: "Employers should be mindful that if this case is widely reported, employees are more likely to be aware of it and assert their rights.

“In making their assessment, employers will need to give thought to how far back a particular worker may be able to claim in respect of historic underpayments. But generally, where a worker brings an unlawful deduction from wages claim based on a series of deductions from an ongoing pattern of incorrect holiday payments, an Employment Tribunal can only look back at the two years preceding the unlawful deduction from wages claim being brought."

“Employers will also need to assess their overall financial liability which, together with potential litigation costs, projected lost management time and the risk of adverse publicity, will colour their decision on how to address the underpayments.”

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