Education briefing - Holiday pay – Government consults on changes to calculating holiday entitlement for part-year and irregular hours workers

• United Kingdom

• Education - Briefings

17-01-2023

 

The recent Supreme Court decision in the case of Harper Trust v Brazel confirmed that an employer was wrong to cap holiday pay at 12.07% of annualised hours for a zero hours contract worker working on a term-time only basis. See our briefing on the decision.

During the various hearings the employer argued that the leave requirement for part-year workers should be pro-rated to take account of the weeks in which they are not required to work, as to not do so was inequitable as it meant that the worker would be entitled to a much higher proportion of their actual earnings than if they had worked full-time. The response of the EAT, Court of Appeal and Supreme Court was that was a consequence of the way the legislation was drafted. It is this legislation which the Government is now looking at amending.

Part-year workers are those who work for varying hours during only certain weeks of the year but have a continuing contract throughout that year – the most obvious being zero hours and term-time workers.

We set out below details of the proposals contained in the consultation. The key point for institutions to note is the Government’s intention is to change the law so that those who work irregular hours receive holiday pay based upon their actual working patterns. This would in particular mean that part-year workers would see their entitlement reduced from that which has been applicable following the case.

The consultation

The consultation - Calculating holiday entitlement for part-year and irregular hours workers – was published on 12 January and closes on 9 March. It commences by saying that as a result of the decision in Harpur Trust, part-year workers are now entitled to a larger holiday entitlement than part-time workers who work the same total number of hours across the year and that the Government is keen to address “this disparity” to ensure that the holiday pay and entitlement received by workers is proportionate to the time they spend working.

The Government estimates that between 320,000 and 500,000 permanent term-time and zero-hours contract workers will receive more holiday entitlement following the Harpur Trust decision and that around 37% of these are workers in the education sector.

Although the focus of the consultation is the proposed introduction of a new holiday entitlement reference period for part-year and irregular hours workers, it also looks at how this could impact on agency workers, as it believes between 80,000 and 200,000 agency workers may receive more holiday entitlement following the decision.

The consultation deals (as the case did) with the 5.6 weeks holiday per year provided by the Working Time Regulations 1998. Any additional contractual holiday on top of this will remain governed by the provisions in the contract.

The current position

Where a worker’s remuneration for employment in normal working hours does not vary with the amount of work, the calculation of what they get paid when they take holiday is relatively straightforward – they get paid the amount in force at the relevant time. Matters are more complicated, however, where rates of pay vary from week to week – here the pay is calculated on an average over the last 52 weeks (unless, of course, they have been employed for less than 52 weeks, in which case it is averaged over the period of employment). As a further complication, any weeks in which the worker received no pay are ignored and replaced by the equivalent number of previous weeks in which pay was received (with a backstop of looking back no more than 104 weeks).

Although the Harpur Trust case was concerned with whether Mrs Brazel had received the correct amount of holiday pay, the key issue was not what elements went into that pay but how many weeks holiday she was entitled to where she was employed for the whole year but had weeks where she was not required to work and was not paid. The Supreme Court concluded (agreeing with the EAT and Court of Appeal) that she was entitled to 5.6 weeks holiday (and pay) even though she only worked 32 weeks in the year.

In consequence, the amount of holiday pay she and other part-year workers should receive would be higher than someone who would have worked the same number of hours but worked every week (other than when on holiday).

To illustrate this, the consultation gives the example of 2 workers – Chad and Danica. They are both employed for the whole year and work 696 hours a year on a variable hours basis. Chad is part-time doing his hours over 46.4 weeks (and taking the remaining 5.6 weeks as holiday). Danica is a part-year worker and does her 696 hours over 30 weeks, she has 5.6 weeks holiday and does not work or get paid during the remaining 12.4 weeks but is still in employment.

Let’s say, for ease, they are both paid £15 per hour and they are both in their first year so there are no complications of going back beyond the existing year. Chad works on average 15 hours a week (696 hours/46.4 weeks). Danica works on average 23.2 hours a week (696 hours/30 weeks). As things currently stand Chad’s holiday pay would be £1,260 (£15 x 15 hours a week x 5.6 weeks holiday). Danica’s would be £1,948.80 (£15 x 23.2 hours a week x 5.6 weeks holiday).

The Government’s proposals

Introducing a 52-week holiday entitlement reference period

To deal with this “anomaly”, the Government is proposing to introduce legislation to allow employers to pro-rate holiday entitlement for part-year workers so that they receive leave in proportion to the total annual hours they work. The easiest way, it thinks, of doing this would be to introduce 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 52-week reference period. In other words, weeks when no pay was received would no longer be excluded from the average calculations.

The consequence of this is that, in the example above, Chad and Danica would receive the same amount of holiday pay as what would be relevant would be the number of hours worked during the year rather than how many weeks they were worked over.

Calculation of holiday entitlement using the 52-week reference period

In order to make the calculation as simple as possible, the Government proposes that employers work out the total number of hours the worker has worked in the 52 week refence period and multiply this by 12.07% - as that would be the correct % where non-working weeks are no longer excluded – representing 5.6/46.4 expressed as a percentage. This gives the annual statutory entitlement in hours.

This in essence reinstates the figure used in the Harpur Trust case which was held to be too low when non-working weeks were excluded from the reference period, and is the figure many employers have historically used to calculate holiday pay for variable hours workers.

Two options are set out for defining the holiday entitlement reference period:

• a rolling reference period - in effect whenever holiday is taken the entitlement in terms of hours would depend upon the number of hours worked in the preceding 52 weeks

• a fixed reference period - at the beginning of a new leave year, the worker’s holiday entitlement for the year would be calculated based on the previous 52 weeks 

The disadvantage of the first option is that the entitlement could vary as the holiday year progresses depending on how many hours the individual has worked in the previous rolling 52 week period. This could mean workers not understanding exactly how much holiday they can take at any particular time and makes planning how much holiday to take, and when, complicated.

For this reason the Government favours the second option, as this would give a worker a fixed pot of annual leave that they would then be able to draw from throughout the leave year, in line with how the legislation works for workers with regular hours. Although this entitlement would be based on their working pattern in the previous year, it would provide clarity to workers and employers.

This assumes that the worker has been in employment for at least 52 weeks at the beginning of their leave year. Where they have not, the Government proposes an accrual system where holiday entitlement would be calculated at the end of each month based on the actual hours worked in that month and would receive a monthly entitlement in hours of 12.07% of the hours worked in the previous month. This suggests workers would not be entitled to holiday until they had been employed for a month (which is contrary to the way the accrual system works at the moment), although the consultation does say that employers could use their discretion to allow a worker to take more annual leave than they had accrued in advance.

Calculation of how much holiday is used by taking a particular day off

This part of the consultation considers how to calculate the amount of holiday a worker with irregular hours would use to take a particular day off. Again, two alternatives are suggested:

• a flat average working day - when a worker took a day off, they would take off the number of hours calculated for an average working day

• the average hours worked for specific days - for example, to work out the amount of holiday it would take to have a Monday off from work, employers would calculate the average hours that a worker worked each Monday in the reference period

The Government says the first option could potentially create incentives for workers to take particular days off as holiday, to maximise their holiday pay whilst minimising their time off work. As by requesting to take leave on days where they would have worked below the average number of hours, workers could potentially be paid more for a day than if they had worked it. However, this is the Government’s preferred method, as although it thinks the second option would avoid the possible incentives to take or not take leave on certain days and it would make it more likely that workers would get holiday entitlement that more accurately reflects 5.6 weeks off work, it feels this would be more burdensome for business than using a simple flat average.

Calculating holiday entitlement for agency workers

The Government recognises that holiday entitlement is particularly difficult to calculate for agency workers as they may have a contract for services with an employment business or an umbrella company.

The proposal is that when agency workers with a contract for services are on assignment, their holiday entitlement would be calculated in the same way as is proposed for other irregular hours workers who are in their first year of work - the employment business or umbrella company would calculate their entitlement as 12.07% of the hours that they had worked over the previous month, or at the end of an assignment (if shorter than a month). Although in most cases a longer reference period is considered impractical due to the nature of agency work, it is worth noting that where agency workers have a contract for 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 mentioned above.

Given that agency workers have the right to take annual leave whilst on assignment, the Government suggests they could take their accrued annual leave and be paid for it, rather than receiving holiday pay as payment in lieu at the end of their assignment. But for shorter assignments, agency workers might prefer to take their annual leave at the end of their assignment or receive holiday pay in lieu when their assignment comes to an end. Presumably legislation would set out the circumstances in which the entitlement could be paid in lieu and what constitutes a “shorter assignment”.

Where agency workers are not on assignment, the proposal is they would not accrue holiday entitlement as they are not working and these weeks would not be considered when calculating holiday entitlement for any subsequent assignments.

Comment 

Although the Government is clear on what it thinks should be done the consultation asks for views, including on the following: 

• Do you agree that including weeks without work in a holiday entitlement reference period would be the fairest way to calculate holiday entitlement for a worker with irregular hours and part-year workers?

• Would you agree that a fixed holiday entitlement reference period would make it easier to calculate holiday entitlement for workers with irregular hours? 

• Do you agree that accruing holiday entitlement at the end of each month based on the hours worked during that month would be the fairest way to calculate holiday entitlement for workers on irregular hours in their first year of employment?

• Would you agree that using a flat average working day would make it easier to calculate how much holiday a worker with irregular hours uses when they take a day off?

• Would you agree that calculating agency workers’ holiday entitlement as 12.07% of their hours worked at the end of each month whilst on assignment would make it easier to calculate their holiday entitlement and holiday pay?

Given that the consultation runs until 9 March and the Government will then need to respond to the responses it receives, it may be a little time before legislation is introduced (and it would need to approved by Parliament). However, it does seem likely that there are changes afoot in the way holiday pay is calculated for those on irregular hours.

We will keep institutions updated on developments.