This is becoming a very complex area and can get really confusing, there is currently no legal calculation or method.

The fundamental take-home message is that holiday entitlement can no longer be pro-rated for zero-hours or part-year workers to reflect the number of weeks employees work each year – there is now an automatic entitlement to 28 days (or 5.6 weeks) holiday entitlement per annum.

Clarification

Holiday Entitlement

• Under the Working Time Regulations 1998, workers are legally entitled to a minimum of 5.6 weeks’ paid holiday per annum, including workers on zero hour contracts or those working variable hours;
• This means that unless the worker is part-time or fixed-term, there is no difference in holiday accrual or entitlement compared to those working fixed hours;
• Following the decision in Harpur Trust v Brazel in 2022, it is no longer allowable to calculate holiday entitlement for zero hour contract workers using the 12.07% pro-rata method.

Holiday Pay

• By law, all workers are entitled to one week’s pay for each week of statutory leave that they take, where the amount of pay a worker receives will depend on the amount of hours they work and how they are paid for those hours. The principle is that pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work;
• For a zero hour worker, where their working pattern is not guaranteed or fixed, a week’s pay for the purposes of paid holiday entitlement will usually be based on the worker’s average pay from the required holiday pay reference period prior to the calculation date;
• Under the Good Work Plan, the government has legislated to increase the holiday pay reference period to 52 weeks.

The 12.07 pro-rata percentage method

One common method employers have used for calculating holiday pay for workers with irregular hours is to take the number of hours actually worked and multiply it by 12.07%. This gives them the worker’s holiday entitlement for which the worker is paid at their normal hourly rate. 12.07% is used because 5.6 weeks holiday is 12.07% of the hours worked by a full time worker engaged to perform work for the entire year. Under this method part-year, zero hours and casual workers only receive a pro-rated entitlement to annual leave.

*In Harpur v Brazel the Supreme Court unanimously rejected this method for calculating holiday pay, finding that it contradicted the Working Time Regulations. The 12.07% method should therefore no longer be used.

Under the Working Time Regulations (WTR), workers are entitled to 5.6 weeks’ paid annual leave each leave year.  Some employers have traditionally calculated holiday pay for part-year workers on the basis of 12.07% of hours worked.  This is because 5.6 weeks is 12.07% of the total working year.

The Supreme Court has now given guidance on the holiday entitlement for part-time workers who work irregular hours and only work during certain weeks of the year.  The issue for the Court to consider was whether their leave should be calculated:

• on the same principle, proportionally, as full-time employees (which would mean that the weeks they do not work reduce their entitlement); or
• ignoring those weeks in which the worker does not work (in which case their entitlement proportionally exceeds that of other employees).

The Facts

Ms Brazel was employed as a music teacher at a school run by the Harpur Trust (the Trust), working term time only for variable hours each week, under a permanent zero hours contract. She was entitled to a minimum of 5.6 weeks’ paid holiday each year under the Working Time Regulations 1998 (WTR), which she was required to take during the school holidays.

An issue arose over the way in which Ms Brazel’s holiday pay was calculated. Prior to 2011, her holiday pay was calculated by taking her average week’s pay (over the preceding period of 12 weeks, ignoring any weeks in which she was not paid), and paying her a third of her annual entitlement of 5.6 weeks’ holiday following each term.

From September 2011, the Trust changed its calculation method in line with the Acas guidance at the time for calculating holiday pay for casual workers, which stated that the statutory entitlement of 5.6 weeks’ leave is equivalent to 12.07% of the hours worked over a full year, based on working the whole year. The Trust calculated the number of hours worked each term, then took 12.07% of the total and paid Ms Brazel for those hours at her hourly rate as her holiday pay. She claimed that by adopting this method of calculating her holiday pay, the Trust was underpaying her.

How to calculate Annual Leave Entitlement?

The Trust argued that a part-year worker’s entitlement must be pro-rated to take account of the weeks not worked; and that the amount of leave should reflect the amount of work that Mrs B actually performs during the year.

However, the Court found that the WTR do not enable an employer to reduce the leave entitlement of part-year employees to ensure that they receive an amount of leave proportional to full-time employees.  Therefore, the amount of leave that a part-year worker under a permanent contract is entitled to is not pro-rated to that of a full-time worker.  A part-year worker is entitled to 5.6 weeks’ annual leave.

How to calculate Annual Leave Pay?

The WTR provide that a weeks’ pay for the purposes of holiday pay should be calculated in accordance with the Employment Rights Act 1996 (ERA).  The ERA states that where an employee has no normal hours of work, a week’s pay is calculated using the average of the 12 preceding weeks.  This reference period of 12 weeks was increased in 2020 to 52 weeks.  Weeks during which the employee is employed but not paid should be ignored.  Mrs B argued that this method should be used to calculate her holiday pay.  Under this method, the calculation of Mrs B’s holiday pay would be higher than under the percentage method because it ignores weeks in which she was not working.

Last year, the Government issued updated guidance on calculating holiday pay for an employee whose hours and pay varies.  This gives an example that where a part time teacher works term-time only, the employer should take an average of the teacher’s pay rate over the last 52 weeks in which they worked, starting with the last week at the end of the term and ignoring any other periods of school holiday in which the teacher was not paid (the ‘calendar week method’).  It also states that the ‘percentage method’ should not be used.

The Trust argued that if the calendar week method is used, Mrs B was in a more favourable position than full-time workers who work regular hours.  However, the Court concluded that current legislation does not prevent a more generous entitlement for part-year workers.  The Trust proposed alternative methods for calculating Mrs B’s holiday pay.  However, the Court concluded that these methods would involve an “entirely new scheme” for calculating holiday pay entitlement and would be contrary to the ERA and the WTR.

Example of how a 52 week holiday pay reference period would operate

• Chitrita works in a large retail store, working on average 35 hours each week.
• May, June and July are quieter months for the store and so Chitrita typically works 25 hours per week.
• Under the current 12 week reference period for holiday pay if Chitrita takes holiday in August, immediately after this quieter time, her holiday pay will reflect her 25 hour working week.
• This means she will receive less holiday pay compared to busier times of the year.
• However, once the reference period is extended to 52 weeks, Chitrita’s holiday pay would reflect her average hours for the entire year, which are usually higher than during these quieter months.
• This is a fairer approach for Chitrita and her employer as her holiday pay will better reflect her working hours across the year.

Good Work Plan – GOV.UK (www.gov.uk)

Consequences of this decision

The Supreme Court’s decision means that this case has now reached the end of the litigation road. It will be of most immediate consequence to those engaging permanent staff on part-year contracts, such as term-time only staff in the education sector, who are now entitled to holiday pay based on the more favourable method of calculation argued by Ms Brazel.

The decision will not change the calculation of holiday pay for those working regular hours throughout the year, whether full or part time. However, it could potentially be used by those working irregular hours for parts of the year only, and whose holiday pay is based on the old 12.07% guidance, to challenge their employer’s method of holiday pay calculation.

What it boils down to is this: employees who only work for part of the year are entitled to the same holiday pay as those employees who work all year.

The Court concluded that the calendar week calculation method is correct and that the 12.07% calculation method is incorrect.

Harpur Trust (Appellants) v Brazel (Respondent) – The Supreme Court