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The Supreme Court’s holiday pay decision: less flexibility for employers with zero hours contracts

September 27, 2022

How can a week’s pay for holiday pay be calculated when the rate of pay varies from week to week, and some weeks are not worked at all?

The Supreme Court in July has clarified the calculation of holiday entitlement for part year workers, i.e. individuals who are employed full time but the nature of their work is such that they work for intermittent periods of time (Harpur Trust v Brazel [2022] UKSC 21).

Under the Working Time Regulations 1998, workers in the UK are entitled to 5.6 weeks’ of paid leave each year. For each week of leave, workers must be paid at the rate of “a week’s pay”.

This naturally causes difficulty when workers have no normal working hours. The question is how can a week’s pay be calculated when the rate of pay varies from week to week, and some weeks are not worked at all?

The percentage method

In the past, employers have traditionally used a method which was to calculate holiday accrual at a rate of 12.07% of hours worked. Recently however, ACAS removed this recommended approach from their website, and employers have been left to wonder which method should be adopted.

In Harpur Trust v Brazel, the Claimant was a visiting music teacher who worked only during term-time, under a zero hours contract. In application of the Working Time Regulations, she was entitled to 5.6 weeks’ paid annual leave which was paid to her at the end of each term, calculated using the 12.07% method.

The calendar method

Mrs Brazel brought a claim in the employment tribunal, arguing that a correct calculation under the Employment Rights Act 1996 would be to work out the average earnings over the 12-week period immediately before the holiday was taken, disregarding any weeks where no work was carried out (the reference period has since changed to 52 weeks). This “calendar” method would, in practice, mean a higher rate of pay amounting to 17.5% in a year where Mrs Brazel works 32 weeks. According to Mrs Brazel, there was no reason to make a distinction in the calculations for full time workers and part time workers. The tribunal disagreed.

On appeal, both the EAT and the Court of Appeal agreed with Mrs Brazel and held that there should not be a cap and the calculation method in the Working Time Regulations should be followed for all workers.

The Supreme Court referred to the ECJ’s findings in past jurisprudence that workers only accrue entitlement to paid annual leave under the Working Time Directive when they are actually working. However, article 15 of the Working Time Directive does allow member states to implement more generous provisions, and there is nothing preventing member states from putting in place measures that would treat part-time workers more favourably than full-time workers.

Harpur Trust argued that the calendar method would lead to abnormal results, citing the example of an exam invigilator who would typically work only 3 weeks per year around 40 hours per week. Applying the proposed calculation method, this individual’s holiday entitlement would be of 5.6 weeks at full pay, i.e. more than the total annual salary they are entitled to. The Supreme Court noted that any general rules could produce anomalies and that it would be rare in any case for invigilators to work under a permanent contract, which means there would be very few instances where this would be the case.

Practical consequences

The consequence of the Supreme Court’s decision will be significant for employers who employ workers without normal working hours. They will have to change the way holiday entitlement and holiday pay is calculated for those workers, moving away from the 12.07% accrual rate. For the purposes of holiday accrual, employers should take into account all weeks under the contract (whether or not any work was carried out that week), but for the purposes of holiday pay, employers should only take into account weeks where work was carried out.

Below is a practical example of how the calculating method impacts the holiday pay:

Ms A works 75 hours per school term (over 32 weeks in a year) and is paid £20 per hour.

Using the percentage method, Mrs A would be entitled to 12.07% of hours worked as paid leave – a total of 9.05 hours. Multiplied by her hourly rate, that is £181.05 per year.

Using the calendar method set out in Harpur Trust v Brazel, Mrs A would be entitled to the average pay over the preceding 52 weeks, discounting weeks not worked.

Mrs A works 75 hours over 32 weeks which is a total pay of £1,500. Divided by 32, this is £46.88 per week or £262,50 per year.

Businesses who employ individuals without normal working hours will therefore be well advised to change their usual practices. There will also be a risk of claims from current workers who have been paid for their holidays using the percentage method of calculation.

For assistance in reviewing your organisation’s employment contracts to take this decision into account or in considering employment practices in relation to holiday pay, please contact the Employment Team.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice specific to your situation and should not be relied upon. Appropriate legal advice should be sought for your specific circumstances and before any action is taken.

© Miller Rosenfalck LLP, September 2022

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