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Where are we now after the Supreme Court’s Holiday Pay decision last year?

Miniature woman on calendar holiday pay

In July 2022, we wrote about the Supreme Court decision in Harpur Trust vs Brazel which held that 12.07% holiday pay calculation method is incorrect for workers with irregular working patterns and pay that corresponds to those patterns. The Government is now consulting on how to address the impact of this decision.

Harpur Trust vs Brazel decision

In summary, in Harpur Trust vs Brazel the Supreme Court found that:

  • The common approach of using the 12.07% of hours worked accrual rate to calculate holiday pay for workers with irregular hours (the “Percentage Method”) was incorrect. This accrual rate derives from the fact that the standard working year is 46.4 weeks (that is, 52 weeks less the statutory 5.6 weeks’ holiday entitlement), and 5.6 weeks is 12.07% of 46.4 weeks. This calculation method was (for a time) recommended by ACAS guidance and used widely by employers to calculate holiday pay for workers with irregular hours.
  • In fact, the correct interpretation of the Working Time Regulations 1998 (“WTR”) is that a worker is entitled to a minimum of 5.6 weeks’ holiday per year and the holiday pay for workers with irregular hours should be calculated in accordance with the formula set out in the WTR itself – namely by reference to a “week’s pay” averaged over a period of 52 weeks but discounting any weeks in which the worker received no remuneration (the “Calendar Week Method”).

Impact of the decision

The impact of the decision has been wide-ranging; the two key issues thrown up by it are that:

  1. It can result in anomalies because of working patterns. For example, an exam invigilator who is employed for a whole year but only works one week per year and is paid £100, would be entitled to £560 holiday pay (the 51 weeks in which they receive no remuneration, being discounted) rather than their holiday being pro-rated to the time they have actually spent working. The Government has estimated that as a result of the decision around 320,000 – 500,000 permanent term-time and zero-hours hours workers, with approximately 37% of these workers working in the education sector, are entitled to a larger annual paid holiday entitlement than part-time workers who work the same total number of hours across the year. It has also estimated that there are around 80,000 – 200,000 of agency workers who may receive more holiday pay entitlement.
  2. In practice, the Calendar Week Method can only be relied on to calculate a week’s holiday. Neither the statutory formula nor the Supreme Court in Harpur Trust provide for a calculation of fractions of weeks, leaving employers uncertain as to how to calculate a day’s holiday. There is currently no ACAS or other guidance on how to do so.

Government consultation

To address the impact of the decision, the Government has launched a consultation, expected to close on 9 March 2023, the aims of which are largely to reverse the decision in Harpur Trust. As part of the consultation:

  1. The Government has proposed introducing a 52-week holiday entitlement reference period for part-year workers and workers with irregular hours, based on the proportion of time spent working over the previous 52-week period (including weeks in which no work was done). Holiday entitlement would be calculated in hours at the start of the leave year, as 12.07% of the hours worked in the previous 52 weeks. An accrual system would apply in the first year of employment, whereby at the end of each month the worker accrues leave equivalent to 12.07% of the hours worked in that month.
  2. For agency workers, the Government has acknowledged that a 52-week reference period is impractical given the nature of agency work. Therefore, it has proposed that agency workers accrue leave each month at 12.07% of hours worked. No leave will accrue in between assignments. Leave can be taken during an assignment, or for shorter assignments, could be taken (or paid in lieu) at the end.
  3. The Government has also included a proposal for how to deal with the length of a day’s holiday where the worker has irregular hours, namely that day’s holiday should be based on a “flat average day”, calculated as the average length of a working day for that worker over the 52-week reference period used to calculate annual leave entitlement.

What is the likely outcome?

There seems to be a sense of urgency in that there is a significant cost impact of this decision and that it has created some practical difficulties and uncertainty for employers. However, there is currently no indication as to when any changes may be implemented and until then the decision in Harpur Trust remains established law.

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