The Corporate Insolvency and Governance Act 2020 has now received Royal Assent. It applies to most companies as well as Limited Liability Partnerships.
The decision of the Court of Appeal in The Harpur Trust v Brazel & Unison published on 6 August 2019 has made clear that employers can no longer legally calculate holiday based on 12.07% of hours worked over a year for those employed on permanent contracts of employment.
So how do you calculate holiday entitlement and pay for employees on zero-hours contracts? Is the approach different for casual workers engaged for discrete assignments only? What about part-time workers?
Mrs Brazel was a music teacher who visited a school run by The Harpur Trust to provide lessons to pupils. She was employed on a permanent contract and was paid an agreed hourly rate for the hours she had worked in the previous month. She only attended the school when she was required to provide lessons, so she had no set number of working hours, and her hours were dependent on how many pupils were learning to play an instrument that term. Mrs Brazel did not work for the Trust during the school holidays, and it was agreed that she take her annual leave during this time as the children did not need teaching.
The Trust paid Mrs Brazel holiday pay three times a year, once at the end of each term. They worked it out by calculating Mrs Brazel’s earnings at the end of each school term and paying her 12.07% of those earnings for that term.
Mrs Brazel argued that this figure actually meant that she was receiving lower holiday pay than was permitted by the Working Time Regulations. She argued that instead holiday pay should be calculated by working out her average weekly pay for the 12 weeks before the holiday; multiplying it by 5.6 (the maximum amount of holiday anyone is entitled to under statue); and paying one third to reflect the three-time-per-year holiday pay arrangement.
The Trust argued that Mrs Brazel’s suggested method of calculation would equate to 17.5% of annual earnings and instead holidays should be pro-rated as she worked fewer weeks than the standard working year. Using Mrs Brazel’s calculations would mean that she would be paid proportionally more in respect of annual leave than employees who worked full time.
The Trust gave the following example showing how disproportionate Mrs Brazel’s method of calculating holiday pay could be:
“[Think about a] school cricket coach, who would only work for one term…for which he earned, say, £1,000, and who would then be entitled to 5.6 weeks annual leave, for which they would receive £5,600 [during his annual leave]”.
Despite the Trust’s compelling example, Judge Underhill disagreed with the Trust entirely. He considered that there are two types of part-time permanent employees to consider:
- Part-time employees – Those who work on a part-time contract but have normal weekly working hours, e.g. Monday to Wednesday each week for the full year.
Judge Underhill confirmed that that pro-rating holiday entitlement for these part-time employees is compliant with the Working Time Regulations because they can be given 5.6 weeks leave. For example, if they only work three days a week, the overall effect is that they have 16.8 days off per year, rather than the maximum of 28 days for a full-time permanent employee.
- Part-year employees – Those who do not have guaranteed hours so the hours they work will vary, and who for parts of the year may have no work at all. This could include term-time-only employees and employees on a permanent zero-hours contract.
Judge Underhill determined that pro-rating holiday entitlement does not apply to part-year employees under the Working Time Regulations. Judge Underhill concluded that part-year employees are entitled to receive 5.6 weeks paid annual leave at their average weekly remuneration in the 12 weeks preceding the holiday.
Judge Underhill acknowledged the cricket coach example given by the Trust by saying:
“I accept that applying the terms of the [Working Time Regulations] without pro-rata reduction […] will produce odd results in extreme cases such as those of the cricket coach […], but general rules sometimes produce such anomalies when applied to untypical cases”.
It is clear from Judge Underhill’s judgment that he recognised the potential implications of his decision but concluded that the Working Time Regulations did not provide for a pro-rating approach to holiday accrual for permanent staff. Although we do not believe that the intention of the UK Parliament was for zero-hours or term-time-only employees to continue to accrue holiday when not working, we recognise that the Working Time Regulations, as noted by Judge Underhill, do not incorporate the pro-rata principle. We consider that this decision may force the Government to address the current legislation and provide a clear system for working out holiday pay for permanent zero-hours or term-time-only employees, but how quickly this is likely to happen is anybody’s guess.
This ruling will have a huge impact on employers and organisations who use part-year employees. Our view is as follows:
- For part-time employees who have normal weekly working hours the judgement makes no difference as their 5.6 weeks holiday will continue to reflect their normal working hours within a week;
- As the case held that holiday could no longer be pro-rated for permanent zero-hours or term-time-only employees, that means that the 12.07% method of calculating holiday pay is therefore no longer available for these group of employees.
- Zero-hours employees on permanent contracts have an automatic right to 5.6 weeks holiday and therefore 28 days holiday regardless of the amount of time they work.
- Holiday pay for zero-hours employees who take their 28 days leave needs to be calculated based on their average weekly remuneration in the 12 weeks preceding the holiday – using their contractual hourly rate of pay will not be compliant with the law as it stands.
- Whilst the judgment does not directly comment on zero-hours workers treated as employees only for the purposes of each assignment they undertake, the 12.07% accrual approach may still be lawful for them when set up appropriately.
This decision could have significant cost implications for employers who engage zero-hours and term-time-only employees on a permanent basis and, therefore, we would strongly recommend that any employer with zero-hours or term-time-only contracts urgently reviews its holiday-pay arrangements.
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