The calculation of holiday entitlement and holiday pay for casual workers has become complex.

The background

Workers in Great Britain, including part-time workers, have a right to a minimum of 5.6 weeks’ holiday under the Working Time Regulations 1998 (WTR) – often called ‘statutory entitlement’.  Workers are entitled to be paid at the rate of a week’s pay in respect of each week of leave. This is straightforward for full time and part time workers who work regular hours and whose pay doesn’t vary through the year.

For workers with no normal working hours and variable pay, under the Employment Rights Act 1996 (‘ERA’) a week’s pay means their average weekly pay in a reference period of 52 weeks before the calculation date, which is the first day of the relevant period of holiday.

Casual workers

Before the Supreme Court’s landmark decision in the Harpur Trust case, most employers calculated the holiday entitlement of their workers who worked irregular hours, such as those on zero hours contracts or part-year employees, using the following recommended ACAS guidance: 

• Standard working year is calculated at 46.4 weeks (52 weeks less statutory 5.6 weeks’ holiday entitlement)
• 5.6 weeks is 12.07% of 46.4 weeks
• So, holiday entitlement accrues at the rate of 12.07% of hours worked from standard working year 

12.07% of annualised hours was generally accepted as the correct method of calculating holiday entitlement and holiday pay for workers with irregular hours or part-year workers. 

The Harpur Trust case

The Harpur Trust employed Mrs Brazel, the claimant, as a visiting music teacher at a school which was run by the Trust. Her contract with the Trust was a permanent contract on a zero-hour basis, and she worked most of her employment hours during school term-time. Therefore, she was only paid for the amount of work that she carried out during the time she was working. She was both a ’part-year worker’ because she did not work a full working week and a ‘part time worker’ because, she did not work at all for the Trust during the larger parts of the year (school holidays). 

Her contract stipulated that she was entitled to 5.6 weeks of annual leave to be taken during school holidays. Since school holidays were noticeably longer than the statutory holiday, the Trust calculated her holiday entitlement, and provided her with three equal payments at the end of each school term, in respect of holiday pay. The Trust calculated the holiday entitlement figures using the ACAS guidance and paid her 12.07% of her earnings for the hours she worked at the end of each school term.  

Mrs Brazel brought an employment tribunal claim against The Harpur Trust, claiming that the Trust had unlawfully deducted from her wages as a part-year worker, and that she was treated less favourably as a result of being a part-year employee. She argued that the approach Harpur Trust took with the 12.07% calculation was not consistent with WTR which did not mandate pro rating for those working less than a full year.  

The Employment Tribunal which heard her case dismissed her claims and concluded that part-year employees who were employed for less than 46.4 weeks per year could have their holiday pay capped at the calculated sum of 12.07% hours.  

Mrs Brazel then appealed her case to the EAT and the appeal was upheld. The EAT stated the WTR did not require pro rating of holiday entitlement for part-year employees even if this meant treating them more favourably than full time employees. Thus, Mrs Brazil’s entitlement should not have been capped. Harpur Trust’s appeal to the Court of Appeal failed and the decision was upheld.

The Harpur Trust then appealed the decision to the Supreme Court. The Supreme Court has recently dismissed the Trust’s appeal, giving a similar account of reasoning as the Court of Appeal. 

Key take aways for employers and their advisers

• The 12.07% method is no longer lawful for calculating holiday entitlement or holiday pay for part year workers and should not be used.
• Part-year workers are entitled to the full 5.6 weeks holiday entitlement, not a pro rata entitlement based on the part of the year they have worked.
• When paying holiday for part year workers, the calculation of a week’s pay must be done by averaging their pay over the previous 52 weeks on the first day of their leave. 
• The biggest impact of the decision in Harpur is on hourly paid workers on permanent contracts who, like Mrs Brazel, have non-working weeks during the leave year (for example, seasonal workers, college students working outside term time, or term time workers). The greater the number of non-working weeks, the greater their holiday entitlement (and therefore holiday pay) will be as a percentage of annual working time and earnings.
• Employers who have been using the 12.07% method are now at risk of claims for unlawful deductions from pay going back 2 years.
• While the Harpur case has clarified things for part-year workers, the position is far less clear for workers on zero hours contracts and other casual and part time workers who work throughout the year. It is not clear if this decision applies to them.

How do I stay legally compliant with holiday entitlement and holiday pay?

Following the Harpur decision, the ‘Calendar Method’ is now the only reliable method for calculating holiday pay for any worker who does irregular hours: 

• If an employee takes a week of holiday, they should be paid a week’s pay as calculated by the statutory formula under the ERA (see above). 

Holiday entitlement in days or hours is more difficult to work out if an employee’s hours or days differ per week. The following method has been suggested to guide the employer in their calculation: 

• Base the annual leave entitlement on the number of days in the average week they have worked.
• For example, if in the average week the employee has worked 2.5 days long, then a day’s holiday would be calculated as: 1÷2.5 = 0.4 of a week. 
• Therefore, 0.4 of a week’s pay would be paid and the remaining holiday entitlement would be reduced to 5.2 weeks from 5.6 weeks (the statutory holiday entitlement for all workers including part-year workers). 
• If there is no standard length for a working day, a similar exercise could produce holiday entitlement in hours.

Will this be the end of zero hours contracts?

Zero hours contracts have long been used to give flexibility to both employers and those who want casual working arrangements. However, the administrative burden and cost of holiday for zero hours workers may now mean that employers move away from using them. 

Alternatively, employers may change the way they use zero hours contracts by ensuring workers to do a minimum amount of hours each week when they are not taking holiday.