The holiday pay saga continues; but is the end in sight

The latest development in the law on holiday pay sees the government announce a consultation on a proposal to overturn the controversial judgment in the case of Harpur Trust v Brazel.

THE CURRENT LEGAL POSITION

In July 2022, the Supreme Court issued its judgment in the long-running case of Harpur Trust v Brazel regarding the correct calculation of annual leave and holiday pay for employees with irregular working patterns.

The Supreme Court ruled that employees on permanent contracts who only work for part of the year, such as seasonal workers or teachers, should receive the same statutory holiday entitlement (5.6 weeks per year) as employees who work the full year.

This means that employers should not pro-rate the holiday entitlement of “part-year” workers so that it is proportionate to the amount of work they actually do. In particular, the Supreme Court ruled that holiday entitlement and holiday pay should not be calculated using the 12.07 per cent accrual method, which is commonly used to calculate holiday entitlement for employees with variable working hours, as it is not accurate when applied to “part-year” workers.

The judgment, which concerned the correct interpretation of the Working Time Regulations 1998 (“WTR”), has proved controversial and counter-intuitive, meaning that someone who only works for one week but is employed on a permanent contract for a full year, is entitled to 5.6 weeks’ holiday (and holiday pay) in the same way as someone who works all year round.

The decision has proved tricky for employers to implement in practice, particularly umbrella companies, agencies who employ agency workers and those companies that use casual workers. If holiday entitlement cannot be calculated as 12.07 per cent of the hours worked, then how should it be calculated? The Supreme Court did not give an answer to that question.

THE PROPOSAL

Acknowledging the apparent unfairness created by the Harpur Trust decision, as well as the difficulties for both employers and employees in understanding exactly how much holiday a particular employee is entitled to, the government has announced a proposal to change the law so that holiday entitlement for part-year and irregular hours workers will be pro-rated based on the hours they actually work. This proposal would effectively overturn the Supreme Court’s decision in the Harpur Trust case.

The government is inviting businesses, workers and representative bodies to submit their views on its proposal by way of a consultation which will be open until 9 March 2023.

In summary, the government’s proposal is as follows:

Employers will be able to calculate a worker’s holiday entitlement as 12.07 per cent of the hours that they have actually worked in the previous 52 weeks;
The 52-week reference period would correspond with the employer’s holiday year, meaning that at the beginning of a new leave year, the employee’s holiday entitlement for that year would be calculated based on the hours which they worked in the preceding leave year. This would give the worker a fixed pot of annual leave (expressed in hours) that they would then be able to draw from throughout the leave year;
For employees in the first year of their job, their holiday entitlement would be calculated at the end of each month based on the actual hours worked in that month. This accrual-based system would only be required for the first year of employment until the 52-week entitlement reference period could be used;
To calculate how many hours’ holiday will be used by taking a particular day off, the employer would work out how many hours the employee worked on average in a day in the preceding holiday year, then when the employee takes a day off, they would take off the number of hours calculated from this average working day.

In relation to agency workers, the government proposes that they would not accrue holiday entitlement when they are not working on an assignment. It is proposed that their holiday entitlement would be calculated in the same way as for other irregular hours workers who are in their first year of employment (see point 3 above), i.e the employment business or umbrella company would calculate the agency worker’s entitlement as 12.07 per cent of the hours that they had worked over the previous month of an assignment, or at the end of an assignment (if shorter than a month).

However, where agency workers have a contract of employment with an umbrella company that is longer than a year or they work on one assignment that lasts longer than a year, their statutory holiday entitlement would be calculated by using the 52-week reference period set out at point 2 above.

The government’s proposal is only at consultation stage, so it is possible that the proposed calculations set out above may change, or the proposal may not even come into effect at all. However, the confusion caused by the Harpur Trust decision, and the practical difficulties with implementing it in practice, leads us to believe that the law in relation to holidays for irregular hours workers will change in some way in the not-too-distant future.

One question which arises from the government’s proposed approach to holiday entitlement (i.e calculating it by reference to hours worked) is how it will affect the accrual of holiday during periods of sickness absence or family leave when the employee has not worked. It is currently a well-established legal principle that employees on sick leave and maternity leave continue to accrue holiday entitlement, but the calculation proposed in the consultation document does not appear to account for such scenarios. It will therefore be important to see how the proposal translates into legislation (if it does at all).

For the time being, employers who were considering changing their contractual models and holiday pay calculations might consider postponing any plans until after the outcome of the consultation is known.

Brabners in Lancashire is located at Sceptre Court, Walton Summit. If you would like to discuss anything raised in this article, please give us a ring on 01772 823921, quote “LBV” and a member of our team will be happy to assist you.

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