Introduction
Is the Harpur case just about term-time-only contracts in the education sector?
Do part time workers with normal working hours who work all year round get less leave than full time workers?
What should employers that use the 12.07% method do?
Should employers stop using permanent contracts for impacted staff?
What is a compliant approach to holidays for workers with no normal working hours?
How does holiday work for people who are engaged per shift, job or assignment?
How was the 12.07% method supposed to work?
Does the Harpur ruling impact the amount of holiday someone can take, or just what they get paid for it?
What will be the exposure for employers who have got their holiday calculations wrong?
What about agency workers?
What next?


Introduction

In July 2022 the Supreme Court published its landmark ruling in Harpur v Brazel about holidays for an hourly-paid music teacher who worked during term time only and whose hours varied depending on the changing tuition needs of her pupils (for further details, see "Holiday pay for part-year workers should not be pro-rated"). Her employer had relied on the approach recommended (at the time) by Acas, which involved paying a 12.07% supplement on her earnings for holiday pay. The Supreme Court, however, ruled this to be unlawful. Under the Working Time Regulations, she was entitled to 5.6 weeks' leave and it could not be pro-rated downwards to reflect the weeks she did not work. Each week of leave must be paid at the rate of a week's pay and the Supreme Court was clear that "a week's pay" must be calculated by applying the statutory formula. This meant that the calculation for this particular teacher had to reflect her average earnings during the weeks for which she was paid, and that weeks when she was not paid could not be factored into the calculation.

Now that the dust is beginning to settle on the ruling itself, where has it left the approach to calculating holiday entitlement and pay? This article aims to answer some of the frequently asked questions.

Is the Harpur case just about term-time-only contracts in the education sector?

No.

The facts of the case involved someone in the education sector who was employed on a permanent contract but only worked during term-time, but the ruling impacts a much wider group.

In practice, the Harpur case has the greatest impact on situations where people are employed on a permanent or long-term contract but have several weeks when they do not do any work (but are still under contract). Although logically holiday might be thought of as being a form of compensation for work actually done, this case confirms that holiday effectively builds up as time goes by, not as hours are actually worked. This is not just an issue for term-time workers. For example, there are many zero-hours workers who do different hours from week to week and do no work at all in many weeks, but who are under contract in between jobs.

The ruling emphasises that everyone is entitled to 5.6 weeks' leave, no matter what hours they do, and that holiday pay for that leave must be based on the statutory week's pay formula, which generally only reflects worked weeks.

In throwing out the 12.07% method, the case also creates practical headaches when it comes to calculating holiday entitlement and pay for any workers with irregular hours.

Do part time workers with normal working hours who work all year round get less leave than full time workers?

Yes. Technically, everyone is entitled to 5.6 weeks' statutory leave, no matter their working pattern. Those working less than "full time" are still entitled to this amount of statutory leave – they simply have a shorter working week to factor into the equation.

Putting holiday entitlement into practice generally means translating weeks of leave into days. So, for workers on a five-day week, 5.6 weeks works out at 28 days' leave. The Working Time Regulations make no provision for pro-rating holiday entitlement downwards for part-time workers, as the Harpur case highlights. But if somebody is working regular hours over part of the week then, in practice, this means that their 5.6 weeks' leave will equate to less than 28 days. For example, if someone regularly works three days a week (eg, on Monday, Tuesday and Wednesday), a week's leave for them equals three days. In other words, to take a week off they only need to use three days' holiday (since they are off anyway on Thursdays and Fridays). So in practice, if they are entitled to 5.6 weeks' leave each year, that means they are entitled to 5.6 multiplied by three days' leave, which equals 16.8 days a year.

So far, so logical. But the reality is that this calculation is more difficult for people who do not have set hours because then it is not so easy to translate weeks into days.

What should employers that use the 12.07% method do?

Options include the following:

  • Take a wait and see approach. The government is expected to review the Working Time Regulations as part of its initiative to consider all EU retained law. Liz Truss has said that she wants to see this process completed by the end of 2023, meaning that holiday pay rights could be on the agenda for reform very soon. Employees may be happy with the 12.07% method and it may be working in practice.
  • Move to job-by-job contracts. One of the problems highlighted by Harpur is that anyone who is under an employment contract for the whole year will be entitled to 5.6 weeks' paid leave, no matter how many weeks of the year they end up working. If employers have people under contract for many weeks when they are not working then it may be sensible to move away from permanent or long-term contracts.
  • Stick with year-round contracts but come up with a system for holidays that is not based on the 12.07% method.

There are variations on these options, but no solution is ideal. There are trade-offs to be made between compliance and administrative convenience. An employer's approach may therefore depend on a mix of factors, including what their payroll system can do, the likely views of their workforce, their current working patterns and so on. It is recommended that employers take advice to discuss various options.

Should employers stop using permanent contracts for impacted staff?

Since holiday entitlement effectively builds up as time goes by, some employers are questioning whether it is sensible to keep staff on permanent (or long-term) contracts if there are significant periods of time when they are not working.

Whether this is the right solution will, however, depend on the circumstances. There can be benefits to both employers and employees in having a permanent and stable relationship. And, in some situations, pre-employment checks or other leaver/joiner processes will make it very difficult to navigate away from permanent or long-term contracts. In many situations, however, it may be sensible to look at whether shorter contacts or even job-by-job contracts would be the best solution.

What is a compliant approach to holidays for workers with no normal working hours?

This is one of the most difficult – and unanswered – questions. There are two key issues here:

  • working out holiday pay based on the statutory 52-week averaging system, especially if an employer's payroll is not set up for this; and
  • translating 5.6 weeks' leave into days, when someone just wants a day off. What proportion of an average week's pay should an employer pay for a day off, and how should an employer work out how many days of holiday someone can book and take off?

Current government guidance suggests an answer based on an "average working week". For example, if a worker's average working week is 2.5 days and they want to take one day's leave, the employer would count this as 0.4 of a week (because one day is 40% of their average week) and pay them 0.4 multiplied by their average week's pay, looking back at the pay they received in the previous 52 paid weeks (only counting weeks in which they were paid).

Even if an employer's payroll system could achieve this (many are not set up to do so) there is the challenge of calculating an average working week. On what would an employer base this calculation, and how often would they need to update it? It may be difficult to explain this system to workers, and in any case it is not actually set out in the Working Time Regulations so does not guarantee compliance.

Other approaches include calculating a set number of days holiday based – for example, on a predicted working pattern, and building in a system for review. No solution is ideal, however.

How to deal with Harpur v Brazel in practice is not easy and means weighing up legal risk, administrative workability, cost and perceived fairness and consistency as between staff with varying working patterns.

How does holiday work for people who are engaged per shift, job or assignment?

In this type of job-by-job arrangement, the employment relationship terminates at the end of each job with no ongoing obligations. If the worker takes on another job, then the employment relationship starts up again, and then finishes at the end of that job. Workers under these arrangements are entitled to holiday, but if the jobs are relatively short then it is common for holiday to be paid in lieu on termination or tagged onto the end of the job.

When someone leaves employment, the Working Time Regulations require employers to calculate outstanding leave on a pro-rata basis (the 5.6-week entitlement is reduced to reflect the proportion of the holiday year actually worked). When it comes to calculating payment for any outstanding leave, the Regulations apparently provide some leeway. This means that it may be possible to continue to use the 12.07% method for payments on termination.

How was the 12.07% method supposed to work?

The 12.07% method aimed to ensure that a worker with a non-standard working pattern built up statutory holiday entitlement in the same proportion to hours worked as someone on a standard full-time contract. It was always a bit rough and ready, but the idea was that a standard full-time worker would be working for 46.4 weeks of a 52-week year and taking their statutory holiday entitlement for the remaining 5.6 weeks. 5.6 weeks is 12.07% of 46.4 weeks. Therefore, a standard full-time worker would effectively be earning holiday entitlement at 12.07% of the hours they were working.

But the problem with this method was that it was based on common sense rather than the wording of the legislation. The Harpur case highlights that everyone is entitled to 5.6 weeks' leave a year, and it does not build up in proportion to time worked. In fact, it does not technically build up at all – it is the same annual entitlement for everyone, from the start of the holiday year. But the fact that employers are allowed to reduce this entitlement if someone leaves employment part-way through the holiday year means that it often makes sense to talk about holiday entitlement building up as employment continues.

Does the Harpur ruling impact the amount of holiday someone can take, or just what they get paid for it?

Both. Holiday entitlement and holiday pay are two separate things. The case emphasises that all workers are entitled to 5.6 weeks' leave a year and that payment must be based on the statutory formula for calculating a weeks' pay. Both aspects of this ruling may impact employers' arrangements.

In practice, it is often easier to ensure that everyone is taking at least 5.6 weeks off work every year than it is to calculate how much they should be paid for it. Claims are generally also based on underpayment, rather than amount of time off. So, as a general rule of thumb, it is best to focus on making sure the payment is correct. But employers also need to make sure that everyone will be able to take at least 5.6 weeks holiday.

What will be the exposure for employers who have got their holiday calculations wrong?

Claims for holiday pay based on deductions from wages are limited to two years of back pay (in Great Britain). There is also the argument (from the Bear Scotland case) that a break of more than three months between underpayments will break any chain of deductions. This "three-month break" rule was doubted by the Supreme Court in the recent Pimlico Plumbers decision (for further details, see "Pimlico Plumbers part two - compensation for unpaid holiday throughout engagement") but is still available, although it is quite likely to be overruled at some point.

There is potentially greater exposure for employers who have wrongly classified workers as freelancers or independent contractors and not provided them with any holiday at all. Those workers can carry forward their EU minimum holiday entitlement indefinitely.

What about agency workers?

There are two key areas of impact for agency workers:

  • equal treatment – under the Agency Workers Regulations 2010, agency workers who complete a 12-week qualifying period in one assignment have the right to the same amount of leave and holiday pay as a comparable direct recruit. If hirers change the holiday-related arrangements for their own staff, they need to think about providing updated information to agencies so that these can be matched; and
  • compliance with the Working Time Regulations – there is also the challenge of ensuring that agency workers are being afforded their rights to take 5.6 weeks' leave each year and to be paid correctly for it. This is a matter for the agency, rather than the hirer. Achieving compliance has also now become more challenging, given that many agency workers have irregular hours and gaps between assignments. It is likely that some employment businesses will look to ensure that agency workers are not under contract between assignments, even if this creates additional headaches from a pay-as-you-earn perspective.

Depending on the relevant contractual terms and the mitigations that employment businesses put in place, it is possible that agency workers could become a more expensive resource as a result of the Harpur judgment and the spotlight it has placed on holiday compliance. The picture becomes even more complex if other staffing intermediaries are also being used. Holiday pay liability and visibility of the contractual relationship between employment businesses and workers might be expected to become more important topics of negotiation between employment businesses and hirers.

What next?

Both the Working Time Regulations and the Agency Workers Regulations could be up for review very soon as part of the new government's ambitious plans to review all retained EU law by the end of 2023 (for further details, see "What will Liz Truss mean for employment law?"). It may be thought that the law on holidays is ripe for reform.

For further information on this topic please contact Sally Hulston or Colin Leckey at Lewis Silkin by telephone (+44 20 7074 8000‚Äč) or email ([email protected] or [email protected]). The Lewis Silkin website can be accessed at www.lewissilkin.com.