The Supreme Court handed down judgment last week in the case of Harpur Trust v Brazel, upholding the Court of Appeal’s decision that part-year workers should not have their paid holiday pro-rated. This decision will have wide-reaching implications for any organisations who engage zero-hours, term-time only or part-year workers (ie workers on permanent contracts who do not work the entirety of the year).
The need for paid holiday is a fundamental part of an employment contract; Article 2(4) of the European Social Charter highlights it as a condition for just work. The importance of holiday is not in doubt, but its applications can often lead to tricky issues, particularly for organisations which do not always have typical employment relationships or where members of staff are not engaged to work throughout the year.
Paid holiday for atypical workers
The Working Time Regulations (WTR), implementing the EU Working Time Directive, state that a full-time employee or worker is entitled to 5.6 weeks’ paid holiday. The amount of the payment depends on the average weekly pay. Regulation 16 of the WTR specifies that for those working atypical hours, pay is calculated over the average earnings of the preceding 52 weeks; any week in which the worker did not work or earn anything is ignored. The now revoked ACAS guidance provided a method by which the amount of paid holiday due for those working atypical hours could be calculated, namely by multiplying the earnings of the worker by 12.07 per cent (that being the proportion that 5.6 weeks bears to the working year of 46.4 weeks).
A simplified version of the facts and history of the case is as follows:
- Ms Brazel, a music teacher at the Trust, was employed on a permanent contract but for term-times only. She was only paid for the hours she taught, which varied from week to week.
- Ms Brazel took her annual holiday in three tranches, at the end of each term. In 2011, the Trust changed how it calculated her holiday pay. Following the then ACAS guidance, the Trust multiplied the hours she worked by 12.07 per cent and then multiplied that figure by her hourly rate of pay. That sum was then paid as holiday pay.
- Ms Brazel complained that this resulted in her receiving less paid holiday than under the old calculation. The Trust argued that this reflected her accrued leave in proportion to the hours she actually worked.
- The Court of Appeal accepted Ms Brazel’s claim. It stated that as a “part-year worker” there was no ability under UK legislation for her paid holiday to be pro-rated and it rejected the Trust’s argument that it would be unfair in some circumstances.
- The Trust appealed to the Supreme Court arguing that:
- EU law (from which the WTR derives) requires holiday entitlement to be pro-rated,
- there were alternative more logical readings of the statute, and
- it was absurd that someone who worked for a few days a year would have a larger percentage of holiday entitlement (as a proportion of the time they work) than someone who worked full time.
- EU law (from which the WTR derives) requires holiday entitlement to be pro-rated,
For more on the facts and history of the proceedings please see our previous blog post on the Court of Appeal decision.
The Supreme Court decision
In a unanimous verdict, the Supreme Court rejected the Trust’s arguments. In short, it confirmed the entitlement to 5.6 weeks’ holiday applies to full- and part-year workers in full, without pro-rating. For those with no normal working hours, pay ought to be calculated by reference to the hours worked over a 52-week average, rather than limited by the number of hours the worker has worked.
In rejecting the Trust’s argument, the Supreme Court stated:
- EU law did not require holiday entitlement to be pro-rated in all circumstances and the directive from which the right is derived allowed for more favourable provisions. Moreover, the UK legislation implementing the UK law did not make any provision allowing for pro-rated holiday entitlement for part-year workers.
- The alternative constructions put forward by the Trust were fundamentally inconsistent with the legislation. The difference between the holiday entitlement of a full and part-year worker came in the reduced amount of holiday pay given their lesser hours worked through the average calculation, not by reducing the percentage entitlement.
- Similarly to the Court of Appeal, the Supreme Court held that the “absurdity” that the Trust argued would occur in a part-year worker receiving holiday pay representing a higher percentage of pay than full- or part-time workers were not well founded. Atypical workers were only slightly favoured. While there would be odd results in certain cases, this did not justify a fundamental re-reading of the statute.
- The Court also noted it was no justification that the Trust followed the ACAS guidance at the time, as the guidance cannot “affect the proper construction of the statutory wording”.
It is important to note this judgment only applies to employees and workers. It does not apply to genuine independent contractors. However, following the decision in Uber, Tribunals will look more forensically to see if that relationship is a sham. For more on Uber see our previous blog post here.
What can organisations do now?
While the state of the law has not technically changed, there is now no further course of appeal. Short of a change in the legislation (unlikely in the current climate), the law in this area is now settled: for part-year workers, entitlement to holiday is 5.6 weeks per year and their holiday pay should be calculated by reference to average earnings over 52 weeks, not by reference to the hours worked.
As a minimum, you should review your holiday practices and contracts to understand whether they comply with the Supreme Court judgment. We recommend that you engage with your legal advisers in this regard.
There are other steps that organisations potentially affected by this decision ought to consider taking:
1. Conduct an internal audit and assess your financial liability
Conduct an audit to find who you employ or engage (or have employed or engaged) on a permanent contract but for only part of the year and so who might be affected by the Supreme Court’s decision. Work out what the difference is between what they are currently being paid for holiday pay and what they should be paid following the Supreme Court’s decision. This is your annual underpayment.
In thinking about who might be impacted, you will need to consider how far back to look. In general, a claim for unlawful deduction of wages can be brought for a maximum of two years’ worth of back pay. A claim needs to be brought within three months from the last deduction.
If, however, a member of staff was misclassified as an independent contractor, and therefore did not receive any holiday pay, it might be longer than this. In Smith v Pimlico Plumbers, the Court of Appeal ruled that the two-year limit on the claim did not apply, which led to a significant pay-out for Mr Smith. For more on Smith see our previous blog here.
2. Speak to your insurance broker and maintain a dialogue
Whilst the insurer is unlikely to be interested unless a claim is brought, it is worth maintaining a dialogue with your broker to let them know what the position is in terms of your current liability.
3. Plan your communication strategy with key stakeholders
Keep your senior leaders, legal and reputation management advisors informed of progress and developments and get their input in charting the best course forward. Will you offer up back payments? If so, how far back will you go? Will you otherwise wait for employees to raise the issue of historic pay and only seek to rectify the position moving forward?
Bear in mind that trade unions are alive to this issue. UNISON was allowed to make submissions in the case despite not being a party. As anyone who has attempted to catch a train in the past few weeks can tell you, we are experiencing a rise in the prominence of union action. Organisations that recognise a union should be prepared for unions to ask about what they are planning to do following this decision. For more about how to manage union relationships please see our previous article here (although written for schools, the content is relevant to any organisation seeking to understand the trade union recognition process).
With many thanks to Alex Evans, a current paralegal in our Employment team, for co-authoring this blog.
If you require further information about anything covered in this blog, please contact Jonathan Eley, Alice Yandle, Tabitha Juster or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2022