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Calculating holiday pay for irregular workers: Court clarifies correct approach

  • United Kingdom
  • Employment law - HR E-Brief

06-08-2019

The Court of Appeal has confirmed that an employer was wrong to cap holiday pay at 12.07% of annualised hours for a zero hour contract employee working term-time. Instead, it should have based it on average earnings over the 12 week period immediately before leave is taken, even though this may provide more favourable results for term-time workers when compared to full-timers. Although the sums involved are typically small, the 12.07% approach is standard practice is some sectors, making this decision of broader importance.

Background

B, a music teacher working on a zero hours employment contract and mostly during term time, complained that her employer had underpaid her holiday pay. B’s contract provided for 5.6 weeks annual leave and her employer directed her to take her holiday outside the term time.

B’s employer argued successfully at Tribunal that, in the case of an employee who works fewer weeks than a “standard” 46.4 week working year (i.e. 52 weeks less 5.6 weeks statutory leave), their holiday pay entitlement should be capped at 12.07% of annualised hours (i.e. 5.6 weeks’ holiday, divided by 46.4 weeks). As such, they calculated B’s earnings at the end of a term and paid her one-third of 12.07% of that figure (to reflect three annual payments of holiday pay). To do otherwise, according to her employer, would unfairly reward term-time workers such as B. In particular, they argued that it could not be right that B worked only 32 weeks of the year and yet was entitled to holiday/holiday pay calculated on the same basis as if she worked 46.4 weeks

B appealed to the EAT arguing that her holiday pay should be calculated according to section 224 of the Employment Rights Act 1996 (i.e. calculate her week's pay by taking her average weekly pay for the 12 weeks immediately before the leave and then multiplying it by 5.6). That approach would result in her receiving a higher percentage of annual earnings as holiday pay, for example, 17.5% of annual earnings if she worked 32 weeks of the year.

As for holiday pay fairness between a term-time employee and a full-time employee, B argued that the law ensures that part-time workers receive “at least” as much as full-time workers and there is no principle to the opposite effect or lawful basis for “writing down” clear and unambiguous provisions. The EAT agreed with B, finding no requirement in law to pro-rata holiday pay for term-time employees so as to ensure that full-timers are not treated less favourably or to avoid a “windfall” for term-time only workers.

Court of Appeal decision

The Court has upheld the EAT’s decision meaning that employers should ensure that they calculate the holiday pay of term-time workers (or “part-year” workers as the Court described them) based on the prior 12 weeks’ average earnings.

Comment

While the outcome of this decision is straightforward, in that it requires the application of section 224 of the Employment Rights Act 1996, it provides employers with much-needed clarity given the absence of a specific statutory calculation for term-time workers and, until now, resulting uncertainty. It will produce some anomalies, such as to favour someone who does not work throughout the year. However, the Court has confirmed that reducing, capping or pro-rating holiday pay is not the correct response.

Some employers have adopted the 12.07% holiday pay approach for term-time workers. They will need to adjust their calculations in the light of this case and anticipate requests for unpaid holiday back pay from those affected.

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