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Supreme Court rules on the calculation of holiday pay

Tom Draper, Rena Magdani, Kevin Poulter and Matt McBride, Employment Partners - Freeths LLP
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The Employment Rights Act 1996 (ERA) defines a ‘week’s pay’ as the worker’s average weekly renumeration in the period of 52 weeks ending on the last day of a week on which the calculation is made. This section also states that weeks where no payment has been made to a worker should be discounted from the calculation of a ‘week’s pay’.

The application of this calculation means that in practice workers who do not work every week will receive a higher proportion of holiday entitlement compared to workers who work regular hours. For this reason, many employers use the ‘conformity principle’ to calculate the holiday pay of their zero hours or irregular hours workers whereby holiday pay is calculated at 12.07% of every hour the worker worked (5.6 weeks of the total 46.4 working weeks in a year amounts to 12.07%). This method of calculation was even endorsed by ACAS.

The recent case of Harpur Trust v Brazel [2022] UKSC21 clarified the law in relation to pro-rated holiday entitlement. The case involved a music teacher who worked during school term time only. This meant that she only worked for part of the year.

Accordingly, her employer calculated her holiday entitlement on a pro-rata basis (12.07% of her hourly rate). However, Miss Brazel argued that her holiday entitlement should be calculated based on her average weekly pay excluding the weeks that she had not worked.

The employer relied on the European Court of Justice (ECJ) case law in which the ECJ ruled that it was permissible to calculate holiday pay based on the ‘conformity principle’.

The employer further argued that the ‘calendar week method’ as proposed by the WTR would lead to an absurd result where zero-hour and part-year workers could receive a larger proportion of holiday entitlement compared to full-time and part-time workers who work regular hours throughout the year.

Nonetheless, the Supreme Court upheld the Appeal Court’s ruling in favour of Miss Brazel due to the following factors;

The ‘conformity principle’ is contrary to Regulation 16 WTR;

It requires employers to keep a detailed record of exact hours worked which is prone to mistakes and impractical in some circumstances;

Although the ECJ has previously ruled in favour of the ‘conformity principle’, the Working Time Directive (WTD) does not prevent a more generous provision being made by domestic law; and

Even if the WTR results in a worker in being entitled to a greater amount of leave compared to a full-time worker, ‘such construction is compliant with the WTD’.

The Supreme Court also concluded that if it had ruled in favour of the employer it would have essentially been amending the legislation set down by the UK Parliament. The Supreme Court did not find the employer’s argument sufficient to justify a revision to the statutory provisions set out in the WTR.

The Court therefore concluded that the ‘calendar week method’ is the correct way of calculating holiday entitlement which is compliant with WTR and the WTD.

In consideration of Supreme Court’s ruling, pro-rating holiday entitlement is no longer a lawful way to calculate holiday pay. Whilst it is important to note that this change does not apply to part time workers who work regular hours it does create a problem for employers who engage workers on irregular hours, especially those who do not work every week and who calculate their holiday pay based on 12.07% of the hours worked.

Conclusion
Employers who engage workers on zero hours contracts or workers who don’t work every week of the year (e.g term time workers) will now need to do two things to ensure that they remain compliant with the law:

Calculate holiday pay based on workers’ average weekly pay over the previous 52 weeks, excluding any weeks which the worker did not work. Instead, renumeration of earlier weeks should be taken into account to bring the total up the 52 weeks (if the worker has not worked for the employer for 52 weeks then an average of the weeks worked should be used); and

Arrange to have any written contracts with such workers amended if they include reference to the conformity principle or the 12.07% holiday pay calculation to reflect this new method of calculating holiday pay.

It also creates an issue in respect of potential claims for backdated holiday from these workers if they have had their holiday pay calculated incorrectly. There is a three month time limit for such claims and therefore employers would be wise to amend their working practices promptly in order to reduce the likelihood of claims in the future.

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