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Education briefing - Supreme Court decision on calculating holiday pay for term-time only staff

  • United Kingdom
  • Education - Briefings

21-07-2022

 

The Supreme Court has confirmed that an employer was wrong to cap holiday pay at 12.07% of annualised hours for a zero hour contract worker working on a term-time only basis. Instead, under the rules applicable at the time, it should have based it on average earnings over the last 12 weeks immediately prior to the relevant leave in which the worker worked, even if doing so provided more favourable results for term-time workers when compared to full-time staff.

Although the case concerned a term-time worker, the decision is equally applicable to those who work for varying hours during only certain weeks of the year but have a continuing contract throughout that year – described by the Supreme Court as “part-year workers”.

It should also be noted that, at the time to which the claim related (January 2011 to June 2016) the reference period for calculating holiday pay for workers with no normal working hours was the previous 12 weeks in which they had worked. However, with effect from April 2020, this was extended to 52 weeks (or if the worker has been employed for a shorter period, the number of complete weeks in which the worker has worked since they have been employed). Under the extended reference period, weeks in which no remuneration is payable by the employer to the worker are still ignored, save that no account is taken of remuneration more than 104 weeks before the calculation date.

Background

The calculation of holiday pay for workers who have no normal working hours can present logistical difficulties for institutions. Strictly speaking, the statutory requirement is that payment for each period of holiday taken has to be calculated based on the average pay which the worker has received in the previous 52 weeks of work.

This is because regulation 16 of The Working Time Regulations 1998 (WTR) provides that, for workers with no normal working hours, the amount of a week's pay in relation to annual leave is the amount of the worker's average weekly remuneration in the preceding 52 weeks they have worked (or if the worker has been employed for a shorter period, the number of complete weeks in which the worker has worked since they have been employed).

For convenience, however, many employers have historically calculated the holiday pay in respect of such workers as an additional 12.07% of the relevant hourly rate for every hour worked.

However, in 2018 the Employment Appeal Tribunal (EAT) concluded in the case of Brazel v Harpur Trust that this calculation was not appropriate and may result in underpayments to workers who are employed on a casual or zero hours basis.

The Trust unsuccessful appealed to the EAT decision to the Court of Appeal and then to the Supreme Court.

Facts of the case

Mrs Brazel was one of a number of visiting music teachers employed by the Trust. She worked at Bedford Girl’s School (the School) under a zero hours term-time contract. Her contract of employment stated “As a visiting teacher, requirements for your services will depend upon a varying level of demand for individual personal tuition in your subject/instrument. Demand may vary from term to term. There are no minimum hours of work guaranteed to you and you have no normal hours of work.” During the school terms she worked different hours each week, depending on how many pupils needed lessons in her instruments. She usually taught between ten and 15 hours per week during term time but some weeks much less. During the school holidays she did not teach any lessons and was not required to work. She was paid in arrears at the end of each month.

Mrs Brazel was entitled to 5.6 weeks paid holiday a year, which she had to take during the normal School holidays or at such other times as were convenient for the School. A payment for accrued holiday was made to Mrs Brazel 3 times a year - at the end of April, August and December – and calculated at 12.07% of her hourly rate for the hours she had worked in each term.

Mrs Brazel argued that her holiday should have been calculated (under the rules applicable at the time) on her average weekly pay she had worked in the 12 weeks in which she worked immediately preceding the end of each of the three terms – given that her holidays were only taken outside term time.

This calculation equated to a rate for holiday pay of 17.5% for each hour. On this basis Mrs Brazel claimed that she had been underpaid by £1,360.72 between 2011 and 2016. The School contended that its calculations were correct because it had used the 12.07% figure suggested at the time in the ACAS guidance.

Employment Tribunal decision

Mrs Brazel brought a claim of unlawful deduction from wages. The Employment Tribunal dismissed her claim, holding that as she worked for only part of the year her entitlement should be pro-rated and this could be done by applying the 12.07% calculation. The Tribunal agreed with the Trust that to do otherwise would “unfairly reward” part-time workers, as a worker working 32 hours a week would receive a higher rate of holiday pay than a worker who worked the same irregular hours pattern over a “standard” 46.4 week working year (i.e. 52 weeks less 5.6 weeks statutory leave).

The Tribunal thought that words should be read into to the WTR to state “where a worker has no normal hours and works fewer than 46.4 weeks per year any such payment should be capped at 12.07 per cent of annualised hours.”

EAT decision

Mrs Brazel appealed to the EAT, which agreed with her and overturned the Tribunal decision. In reaching its decision the EAT concluded that:

• the exercise which the Tribunal had to carry out was a relatively simple one as Mrs Brazel’s entitlement to holiday pay was set out clearly in her contract

• as Mrs Brazel worked irregular hours her average week's pay should be computed in a simple and straightforward manner using the (then) 12 week averaging method

• whilst that approach could favour someone who does not work throughout the year, the EAT could not see how that justified words being read into the WTR

• the Tribunal had overlooked the fundamental fact that, whilst part-time workers are not to be treated less favourably than full-time workers, there is no principle to the opposite effect

• to impose a limitation which altered the legislation to the disadvantage of part-time workers, ostensibly to redress a potential grievance that might be brought by full-time workers, stood the logic and purpose of the legislation on its head

Court of Appeal decision

At the Court of Appeal, the Trust again argued that to calculate holiday pay in the way put forward by Mrs Brazel was inequitable as it meant that she would be entitled to a much higher proportion of her actual earnings (17.5%) than if she worked full-time (12.07%) - with the result that someone in her position, who worked only 32 weeks of the year, was entitled to holiday pay calculated on the same basis as if she had worked 46.4 weeks.

The Trust submitted that this “inequity” could be avoided by pro-rating the calculation to reflect the number of weeks in the year that Mrs Brazel actually worked.

The Court of Appeal rejected this argument on the basis that “on any natural construction” the WTR makes no provision for pro-rating and that the calculation required by the legislation “is straightforward and should be followed”. Whilst it accepted that applying the terms of the WTR without a pro-rata reduction for part-year workers would produce odd results in extreme cases, it noted that “general rules sometimes produce such anomalies when applied in untypical cases”. In any event, the Court said it would expect it to be unusual for workers whose services are required for only a few weeks a year to be employed on permanent contracts, as opposed to being engaged on a freelance basis.

Supreme Court decision

The Supreme Court summarised the issue as being whether the leave entitlement for a part-year worker should be calculated on the same principle, proportionally, as full-time workers (which would mean that the weeks that they do not work reduce their entitlement) or whether their leave must be calculated ignoring those non-working weeks.

The Trust argued that the leave requirement for part-year workers should be pro-rated to take account of the weeks in which they are not required to work and it put forward two alternative calculation methods to achieve this adjustment.

The Supreme Court, in a unanimous decision, rejected these arguments for the following reasons:

• although the European case law suggests that in general, the minimum entitlements prescribed by the Working Time Directive are calculated by reference to work actually carried out by the worker (subject to exceptions), the Directive does not prevent a more generous provision being made by domestic law

• even if the proper construction of the WTR resulted in Mrs Brazel being entitled to a greater amount of holiday pay than she might be strictly entitled to under the Directive, and to a proportionately greater amount than full-time workers, such a construction is compliant with the Directive

• the incorporation into the WTR of the means of calculating an average week’s pay set out for workers, including those who work very irregular hours, was a policy choice made by Parliament according to which the number of hours worked affects the amount of a week’s pay in some circumstances but not in others

• there is nothing in the WTR which indicates that they should be construed so as to permit the alternative methods of calculating pay proposed by the Trust and aspects of their proposed alternative calculations were directly contrary to what is required by the statutory wording and the Regulations

In conclusion, the Supreme Court stated that the amount of leave to which a part-year worker under a permanent contract is entitled is not required by EU law to be, and under domestic law is not, pro-rated to that of a full-time worker.

Comment

Whilst this decision, merely confirms the position as set out by the EAT and Court of Appeal, it does represent the final step in the UK courts and has implications for those workers who have no normal working hours and particularly (but not exclusively) for those who work on a term time basis or intermittently throughout the year.

It is worth noting that the ACAS guidance on calculating holiday pay now states “If your work has no fixed or regular hours, your holiday pay will be based on the average pay you got over the previous 52 weeks. For example, if you do casual work on a zero-hours contract or shifts that change without a fixed pattern. If for any of the 52 weeks you got no pay at all, use an earlier week in its place for calculating holiday.”

In addition, the BEIS guidance, which was last updated on 23 July 2020, on calculating holiday pay for workers with irregular hours or those on zero-hours contracts, refers to using a 52 week holiday pay reference period in calculating holiday pay for term-time workers.

Whilst, on the face of it, the figure of 12.07% is a logical way of calculating the average pay over a period of time where there are no normal working hours, it is based upon an assumption that the person is working 46.4 weeks a year. If, like Mrs Brazel, they work term-time only, then their working weeks are compressed into a shorter period of time (in her case 32 weeks) and the ratio between working weeks and weeks of holiday is different. As a result, the 12.07% accrual method is unlikely to reflect average pay over the preceding 52 week period and a shortfall will arise.

Institutions should consider whether they have exposure to underpayments for any workers in this category and, if so, whether to take any corrective action in respect of past and/or future payments. Under the unlawful deduction of wages provisions claims can brought in respect of a series of deductions or under-payments and can go back for two years. Claims must be brought within three months of the most recent deduction/under-payment. So in practice this is likely to limit it to existing workers or those who have recently left.

It should also be noted that the principles in this case apply only to pay for statutory holiday pay (ie the 28 day entitlement under the WTR). Pay for additional contractual leave will be determined by the rules set out in the contract not the WTR.