Most HR practitioners knew it was coming but when the Supreme Court issued its long-awaited decision in Harpur Trust v Brazel on 20 July 2022 there was a collective groan in many sectors such as retail and hospitality. While the decision did not affect salaried workers or those on fixed term or fixed part time hours, it still affected potentially between 320,000 and 500,000 permanent term-time and zero-hours workers such as sales assistants or warehouse staff and between 80,000 and 200,000 agency workers.

Dispute

The dispute in the case centred around the application of the simple 5.6 weeks’ holiday allowance for everyone set out in the UK’s Working Time Regulations and illustrated that this is no longer workable because it cannot easily be translated into hours or days for workers whose hours vary and does not include principles for pro-rating.

Ruling

The Court ruled that employers cannot apportion part-year workers’ 5.6 weeks to the part of the year they worked, if they are under contract for the whole year. Instead, employers must calculate a week’s holiday pay by using the calendar method, averaging the last 52 weeks in which the part-year worker actually carried out work; discounting the weeks in which they did not work in order to calculate a week’s holiday pay. The previous traditional method of calculating holiday entitlement by applying 12.07% to the hours actually worked became unlawful.

Fall out

While the Supreme Court’s reasoning on the law was sound, it created an anomaly which resulted in atypical workers being entitled to receive disproportionately more holiday. A specialist on the payroll who works over three weeks a year and is on zero pay for the rest of the year, for example, was entitled to 5.6 weeks’ holiday, paid at the rate of their average weekly earnings in the three weeks they worked, which is the same entitlement as a colleague who works all year round.

The decision also created a significant administrative burden. Think of the hotel employer with 70 students on the payroll who pick and choose shifts during term times. Whereas previously, they simply multiplied hours worked by 12.07%, they would now need to record every hour worked over a period of 104 weeks just to calculate the average hours for holiday pay.

Following Harpur, many businesses worked quickly to change the calculation method they used and to quantify potential historical underpayments of holiday pay. Others reconsidered their use of permanent contracts where employees worked for only part of the year.  Others may have had to budget for higher agency fees as recruitment agencies increased the holiday accrual rates from 12.07% to a higher figure.

Government consultation

On 12 January 2023 the Government launched a consultation stating that they were keen to fix the disparity and make it is easier for employers to comply with the law by simplifying the holiday pay and entitlement rules.

Proposals

First, the Government is proposing that statutory holiday entitlement be pro-rated, so that part year workers and those with irregular hours receive leave proportionate to their total annual hours worked. To reflect that principle, it suggests that employers should calculate an individual’s holiday entitlement at the start of each holiday year by looking back at the hours they worked in the last complete holiday year. They would then multiply last year’s hours by 12.07% to get next year’s holiday entitlement, resulting in a fixed pot for the worker.

In the first year of employment, where there is no fixed reference period, an accrual method is proposed under which employers would need, at the end of each month, to calculate 12.07% of hours worked in that month.

Notably, this would be the first legislative endorsement of the 12.07% method. Previously it had been widely adopted by employers but with no legal basis for using it.

This method does raise a potential issue about how to treat the holiday entitlement gained in the twelfth month as it is only calculated at the end of the year. Employers would have to decide whether to allow it to be taken before it accrues or to be carried over to the next leave year.

Agency workers are covered: they would accrue holiday entitlement on the basis of 12.07% of hours worked at the end of each month of an assignment, or at the end of an assignment if shorter than a month.

The consultation also tackles the question of how to calculate a day’s leave, to rectify the current lack of clarity about how much leave a variable hours worker uses up to take a day off.  The proposal is that if such a worker wanted a day off, employers would work out how many hours of their holiday entitlement this would use up by reference to a flat average working day so that, for example, each day’s leave would use up six or seven hours of the leave pot.

It should be noted that the proposals only relate to calculating entitlement. Holiday pay will continue to be based on a different reference period (the last 52 paid weeks, on a rolling basis, rather than all weeks over the last holiday year) and would still be calculated in weeks without any system for translating this into days or hours.

Drawbacks

The practicalities of how an employer can keep an accurate record of hours worked looking backwards may be challenging. The proposals will result in the introduction of a new category of worker who is “part year” or on “irregular hours”, which will have to be defined. The consultation does not deal with accrual of holiday for those on maternity leave or other family leave, which might clash with the proposed fifty-two-week reference period.  Also, there may well be simpler calculation methods, for example a straightforward accrual system, where individuals build up holiday entitlement for each year at 12.07% of every hour worked that year.

Nonetheless, the consultation (which closed on 9 March) should result in legislation that clarifies the current confused position.  Until then, the Supreme Court’s judgment remains binding law. Businesses that did not make changes after Harpur may now decide to await the outcome of the consultation, while recognising the potential exposure to claims of underpayment by their current part year or irregular hours workers.

Author: Kate Palka, employment and commercial solicitor from The Legal Director.