Percentage Method for Calculating Holiday Pay Ruled Unlawful

The Supreme Court decision in Harpur Trust v Brazel has major implications for thousands of employers, changing the way holiday pay is calculated for staff who work irregular hours on permanent contracts.

On 20 July 2022, the Supreme Court delivered its judgment in Harpur Trust v Brazel, rejecting Harpur’s appeal and upholding the decision of the Court of Appeal ruling that the percentage method for calculating holiday pay was unlawful.

Background in the Harpur Trust v Brazel Holiday Pay Case

Mrs Brazel is a visiting music teacher who continues to work at a school run by the Harpur Trust (Harpur). She is employed by Harpur under a permanent contract on a zero-hour basis. Harpur is not obliged to provide a fixed minimum amount of work and she is paid only for the amount of work carried out and Mrs Brazel works mainly during school term-time.

The length of the school terms varies from year to year but is between 32 and 35 weeks. She is a part-time worker in two senses, firstly, that she does not work a full working week and, secondly, that for large parts of the year (during school holidays) she does not work for Harpur at all. It is only this second type of part-time working with which this case is concerned.

She is entitled to 5.6 weeks’ paid annual leave (both under her contract and statute), which she is required to take during school holidays. As the school holidays are far longer than this, no particular weeks are designated as statutory holiday, but by agreement Harpur makes three equal payments in respect of holiday at the end of each term of 12.07% of her usual pay; a method referred to as the ‘Percentage Method’.

Mrs Brazel submitted an employment tribunal claim, asserting that the 12.07% approach bears no relation to the calculation required by the WTR 1998.

The Employment Tribunal (ET) Decision

Initially, the Employment Tribunal dismissed Mrs Brazel’s claims. It found that there had been no unlawful deduction of wages as a result of the application of the 12.07% calculation. It held that a principle of pro rating should apply, and that the statutory scheme should be read down for part-time workers who worked fewer than 46.4 weeks per year so that payment was capped at 12.07% of annualised hours. The tribunal found that words could be read into regulation 16 of the WTR 1998 to that effect.

Employment Appeal Tribunal (EAT) and Court of Appeal Decisions

Mrs Brazel appealed to the EAT in relation to the correct calculation of holiday pay only. The EAT upheld the appeal, finding that the tribunal had erred in capping her holiday pay at 12.07% of annual earnings. The EAT held that there was no requirement in the WTR to pro rate holiday pay for part-time employees to ensure that full-time employees were not treated less favourably. The tribunal had overlooked the principle that part-time workers were not to be treated less favourably than full-time workers and that there was, as yet no principle to the opposite effect.  It was emphasised that the wording in the Working Time Regulations 1998 was clear. This is that a worker on a permanent contract and engaged for a whole year has an entitlement to 5.6 weeks’ holiday.

Harpur appealed this decision to the Court of Appeal. They believed that they must reduce their teacher’s holiday entitlement so these workers wouldn’t be entitled to holiday pay that may exceed that of full-time staff. The Court of Appeal dismissed their appeal, and the case was taken to the Supreme Court.

The Supreme Court Decision

The Supreme Court agreed with the Court of Appeal and dismissed the appeal unanimously.

Nowhere in EU or UK law did it state that holiday pay should be pro-rated for those who do not work every week of the year. It did not matter that this would give more holiday pay to these workers than those working all year.

The Supreme Court reaffirmed that all workers are entitled to 5.6 weeks’ paid annual leave per year and that the correct method of calculating holiday pay for “part-year’ workers should be based on average pay, ignoring weeks where an individual does not earn anything. This is the case, even if this means individuals receive a greater proportion of holiday pay than full-time workers.  It was found that there is no legislative provision which means that part-timers cannot be better off than comparable full-time workers.

Implications for Employers

This case is important for the leave entitlement of every worker in the UK with no normal working hours.  In essence, the decision means that all zero-hours employees who do not work a full year must have their holiday calculated in this way and not by the application of the 12.07% formula.

Although this particular case concerned a worker who was permanently engaged to work only part of the year and was therefore limited only to part-year workers on permanent contracts, it is likely that other categories of worker may also try to rely on the decision and that similar claims from these types of workers will follow.

Considerations For Employers

Employers who currently use the 12.07% approach to pay holiday to their zero hours staff with permanent contracts should analyse their potential exposure and consider their options. It is clear that holiday pay should be calculated by assessing a week’s pay and multiplying that by 5.6.

How the 5.6 weeks’ holiday entitlement itself should be calculated for such workers (particularly those who do not work term-time only and who take enough leave to satisfy the WTR 1998 in any event), is still not clear. Employers will have to take a pragmatic approach and it is expected that many will continue to use the 12.07% approach to calculating the holiday entitlement until further case law provides more clarity.

Do You Need Assistance?

The specialist employment law team at Employment Law Services (ELS) LTD have extensive experience in advising UK Employers on their legal obligations in respect holiday entitlement and pay to ensure compliance.  If you have any queries about your legal obligations you can call us on 0800 612 4772, Contact Us via our website or Book a Free Consultation online.