Have you been pro-rating / using the 12.07% method to calculate holiday pay for permanent part-year/ casual/ zero hour workers? If you have, the Supreme Court has ruled that you are doing so incorrectly. Instead, all workers, regardless of the proportion of the year that they work, have a statutory entitlement to 5.6 weeks each year. This entitlement should not be reduced on a pro-rata basis just because they work part of the year.

The decision has significant implications for term-time only workers, seasonal workers, zero hours contract workers, bank staff and workers engaged under umbrella contracts. Employers across a wide range of sectors including schools, colleges, care homes, manufacturers and other employers using permanent zero hour contracts will need to take note of this case and consider taking steps to mitigate its effects as discussed below.

The issue before the Supreme Court

Under the Working Time Regulations 1998, workers are entitled to 5.6 weeks paid annual leave. The question which the Supreme Court was asked to consider was whether a worker who only worked some weeks of the year was entitled to the full 5.6 weeks leave, or whether this should be pro-rated to reflect the period actually worked. The Trust argued that the 5.6 weeks leave assumes that the individual works for the remaining 46.4 weeks of the year. The Court was asked to consider the position for employees on permanent contracts who work less than 46.4 weeks.

Facts of the case

Mrs Brazel was engaged on a permanent zero hours contract as a visiting music tutor at a school operated by the Harpur Trust. She worked during term time only and her hours varied depending on the demand for her lessons from parents and pupils. She would usually be less busy, for example, during exam periods in January and May. She was paid an agreed hourly rate each month for the hours actually worked the previous month.

From September 2011, Mrs Brazel's holiday pay was calculated using the established 12.07% method (as previously recommended by ACAS), based on how many hours she had worked in the preceding 12 weeks. She claimed that she was being underpaid holiday pay and that she was entitled to the same 5.6 weeks holiday as workers who work the full year. She claimed that the 12.07% method of calculation had no legal basis.

The decision

The Supreme Court agreed that Mrs Brazel was entitled to 5.6 weeks of paid holiday each year and ruled that the amount of leave to which a part-year worker under a permanent contract is entitled to must not be pro-rated to reflect their part-year status. This is despite the fact that, as a result, a part-year worker will then receive proportionately more paid holiday than a colleague who worked on a full year basis. The Supreme Court further ruled that her holiday pay should be based on an average week's pay over a reference period (not including weeks in which there was no pay) times 5.6 weeks. This was referred to as the "Calendar Week Method".

The Supreme Court rejected the argument that the Calendar Week Method leads to an "absurd result". The example was given of exam invigilators who only work during exam season: "In principle you would have a permanent employee who worked only one week of the year, for which he or she earned say £1,000, and who would then be entitled to 5.6 weeks annual leave, for which they would receive £5,600". This argument was rejected on the basis that, whilst it was accepted that the Judgment put part-year workers in a more favourable position than full-term workers, the outcome was not so absurd that it justified revising the statutory rules under the Working Time Regulations 1998.

The 12.07% method of calculation, as previously recommended by ACAS, was also specifically rejected. Many employers have continued to use this method of calculating holiday pay for workers working irregular hours but the Supreme Court has now made it clear that this is incorrect.

The implications

This judgment means that all workers on permanent contracts, regardless of whether they only work part of the year, are entitled to 5.6 weeks' holiday per year.

The judgment does not affect classic part-time worker arrangements (for example, someone that works three days per week, every week across the year). Employers can still calculate their holiday entitlement on a pro-rata basis compared with a five-day per week worker because, in practice, they still end up with 5.6 weeks of holiday. The significant impact of the judgment will be on workers who are engaged on a permanent contract for the entire year but who only work for part of it. This includes term-time workers (albeit not teachers who are paid across the entire year, including during holidays) and casual workers engaged on permanent contracts but with no normal hours.

What happens if the part-year worker works part-time?

Part-year workers will only be entitled to 28 days' holiday if, when they are working, they work five days per week. If the part-year worker only works part-time, they are only entitled to the relevant pro-rata holiday and holiday pay. For example, if the part-year worker works three days per week (0.6 FTE), they will be entitled to 16.8 days' holiday each year.

Unfortunately the Supreme Court did not give any clarity around dealing with part-year workers whose hours vary, only that employers cannot work out their pay by multiplying the number of hours worked per week by 12.07%. Instead, employers should work out their weekly pay by averaging it over the previous 12 weeks (52 weeks in GB) and ignoring any weeks they are not working. This will then amount to their "week's pay", which should be used for the pay calculation when the worker takes a week's holiday or, if they take less than a week's leave, be pro-rated as a corresponding percentage.

What should you do now?

Some employers may now be faced with significant claims for underpayment of holiday pay where pro-rating or the 12.07% method has been historically used for part-year workers' holiday pay calculations. It should be noted that, unlike GB, claims in Northern Ireland are not limited to two years of back pay and therefore could, potentially, go back to the later of the commencement of the worker's engagement and the commencement of the Working Time Regulations in 1998.

If you engage workers on contracts across an entire year but only require them to work for part of the year, you should consider revising these contracts. Consideration should be given to engaging short-term workers on freelance contracts or, at the very least, ensuring that their engagement terminates at the end of each assignment of work with a payment being made in respect of holiday on termination of each assignment.

Legal advice should be sought before effecting any changes as these will need to be handled delicately in terms of breach of contract and retrospective liability risks.