Since the Supreme Court issued its judgment in the case of Harpur Trust v Brazel in July 2022, umbrella companies and employers generally have been grappling with the implications of the decision in respect of the calculation of holiday entitlement and holiday pay for employees who only work for part of the year.
In our previous articles on this issue, we reviewed the current legal framework for calculating holiday pay, and considered how the outcome of the Harpur Trust case might affect umbrella companies. Now that the outcome of the case is known, where does this leave employers?
Upholding the decision of the Court of Appeal before it, the Supreme Court has 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 as employees who work the full year. In particular, the Court clarified that the 12.07% accrual method, which is commonly used to calculate holiday entitlement for employees with variable working hours, is not accurate when applied to “part-year” workers.
The case was originally brought by Mrs Brazel, a music teacher employed by Harpur Trust. Mrs Brazel’s working hours varied each week. She did not give any lessons during the school holidays, so she only worked during term time. On average, Mrs Brazel only worked 32 weeks out of the year. Importantly however, even though Mrs Brazel didn’t work all year round, she had a permanent contract of employment with the Trust which continued during the school holidays when she did not work (akin to an umbrella contract).
Since Mrs Brazel was employed under an overarching contract but had periods in the year when she did not work, the Court described her as a “part-year worker”, in contrast to a “full-year worker” who works during all the weeks of the year (apart from when they are taking holiday).
At the end of each school term, the Trust paid Mrs Brazel her holiday pay based on 12.07% of the pay which she had earned that term.
Mrs Brazel brought a claim arguing that she had been underpaid holiday pay. Specifically, she argued that the 12.07% method is not set out anywhere in the Working Time Regulations 1998 (“WTR”). In fact, the WTR simply provide that a worker is entitled to 5.6 weeks’ annual leave in each leave year, paid at the rate of a week’s pay for each week of leave. For someone with variable working hours (such as Mrs Brazel), a week’s pay is calculated as the average of the total pay received in the previous 52 weeks (this used to be the previous 12 weeks until the law changed in 2020). Mrs Brazel argued that a very simple calculation was therefore required; the Trust should multiply her average week’s pay by 5.6 and that would produce her holiday pay entitlement for the year. By using the 12.07% method however, this produced a lower overall holiday pay figure. This is because by using that method, her holiday entitlement for the year was pro-rated by reference to her actual working time, whereas she argued that she should receive the full 5.6 weeks’ holiday (and holiday pay) regardless of the fact that there were a significant number of weeks in each year when she did not do any work.
The Trust argued that Mrs Brazel’s annual leave entitlement should be reduced according to the number of weeks she actually worked, otherwise she would get an unfair advantage because she would receive the same 5.6 weeks’ paid holiday entitlement as someone who worked all year round.
The Supreme Court agreed with Mrs Brazel and rejected the Trust’s appeal. As the highest court in the UK, this is the final decision on the matter.
The Supreme Court did accept that allowing part-year workers to have the same entitlement to 5.6 weeks’ holiday as full-year workers could produce “odd results” in extreme cases, but the Court said that general rules sometimes do produce anomalies. The Supreme Court rejected the various alternative methods for calculating holiday pay which had been put forward by Harpur Trust, including the 12.07% method, stating that aspects of the Trust’s proposed methods were “directly contrary to what is required by the statutory wording and the WTR”.
What does this mean?
The Supreme Court’s decision means that the 12.07% accrual method cannot be used to calculate the holiday pay entitlement of umbrella employees who have breaks in-between assignments (or between the end of their last assignment and the termination of their employment) because it will produce an inaccurate holiday pay entitlement (specifically, one which is too low). To put it another way, employees engaged under a permanent contract continue to accrue holiday in-between assignments and their entitlement cannot be pro-rated to reflect the amount of time they have actually worked.
So, if the holiday entitlement of employees with variable working hours cannot be calculated as 12.07% of the hours worked, how should it be calculated? Frustratingly, the Supreme Court did not set out an alternative mechanism, save to say that by the end of the holiday year the employee should have received 5.6 weeks’ holiday, paid at the rate of the employee’s average weekly pay. Unfortunately, the Courts are concerned only with the legal position and they leave it to employers to grapple with how to implement the law in practice.
The Government’s proposal
Thankfully, the Government has recently acknowledged 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.
On 12 January 2023, the Government therefore 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. The FCSA will be responding to the consultation.
In summary, the Government’s proposal is as follows:
- Employers will be able to calculate a worker’s holiday entitlement as 12.07% 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 employment, 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 work (see point 3 above), i.e the umbrella company would calculate the worker’s entitlement as 12.07% 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 are 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, lead 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.
What should you do in the meantime?
Pending any changes to the legislation, the Harpur Trust decision reflects the current state of the law. This means that it is possible that part-year employees who have been (or are continuing to be) underpaid holiday pay as a result of the 12.07% accrual method may bring a claim, and that claim would be decided taking into account the decision in Harpur Trust.
As a first step, we would recommend that umbrella companies carry out an internal audit of the working patterns of their umbrella employees and calculate their potential exposure in terms of underpayments of holiday pay. The umbrella companies which will be most affected will be those that employ contractors who are highly paid and who have regular/lengthy breaks between assignments (or between the last assignment and the termination of employment).
Unless and until the law changes, umbrella companies may wish to consider offering alternative models of engagement, such as fixed term employment contracts or contracts for services which come to an end after each assignment, although it is important that such contracts are properly administered and that they reflect the reality of the working relationship. The time and cost involved in implementing an alternative model of engagement may be unattractive though, particularly if the legal position may change in the not-too-distant future. Until then, employers might also consider continuing to calculate holiday pay using the 12.07% method but carrying out a regular reconciliation to check whether the correct amount of holiday pay has been accrued/paid when compared to the “calendar week” method set out in the WTR.
In the meantime, we await the outcome of the Government’s consultation, which will hopefully finally bring clarity and fairness to this unnecessarily complex issue.
This bulletin is for general guidance purposes only and should not be used for any other purpose.
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