Holiday pay developments for charities

Employment lawyers sometimes quip that holiday pay is the gift that keeps on giving – a relatively minor aspect of the employment relationship that has kept the appeal courts busy ever since the Working Time Regulations 1998 ('WTR') first set out the regime that currently governs the statutory right to paid time off from work.

There are multiple reasons for this. Most workers have a right to a minimum of 5.6 weeks' paid annual leave a year under the WTR, but 4 of those weeks are subject to EU law and 1.6 weeks are not. The right applies to workers as well as employees – but the question of who counts as a 'worker' (as opposed to someone genuinely self-employed) is another legal question that has remained stubbornly unsettled. And whilst working out the holiday rules for someone who works full time for the same employer is a relatively straightforward business, what about everyone who does not fall into that category? Part time workers, casual workers, agency workers and part year workers are all entitled to paid holiday, but how do you calculate their entitlement? What about people who are away from work for other reasons such as sickness or maternity absence? Do they accrue holiday while they are off? And what should be included in holiday pay anyway? Is it just salary or should it also include commission, bonuses, overtime? These are just some of the questions the courts have grappled with since the current law came into effect 25 years ago.

Harpur Trust v Brazel

The most recent problem to emerge is one that particularly affects the education sector, where there are many staff members who have contracts under which they are only obliged to work for part of the year, typically term time only. One of these 'part year workers' Mrs Brazel ('B'), was a visiting music teacher at a school run by the Harpur Trust. She was employed under a permanent contract on a zero-hours basis and was paid only for the work she carried out. B did not work a full working week and, during school holidays she did not work for the Trust at all. Under her contract B had the right to 5.6 weeks paid annual leave as required by the WTR. She was required to take her annual leave during school holidays, and the Trust paid her for her leave three times a year in April, August and December. On each occasion, her holiday pay was calculated as 12.07% of her earnings in the preceding term. However, B argued that this represented an underpayment and not a proper application of the holiday pay rules. If the rules were properly applied, she would receive a higher amount of 17.5% of her earnings for the term. 

B brought employment tribunal proceedings claiming unauthorised deductions from wages for the difference. Her claim was unsuccessful in the employment tribunal but the Employment Appeal Tribunal overturned that decision, finding that she had indeed been underpaid her holiday pay. The Trust appealed unsuccessfully to the Court of Appeal and then to the Supreme Court.

The outcome

The Supreme Court described the issue in the case as whether someone who works part time, irregular hours during only some weeks of the year but with a contract that subsists throughout the year, falls to have their leave entitlement reduced pro rata or not.  It was unanimous in deciding that there should be no pro rata reduction – a decision that has caused some consternation throughout affected sectors, not least because the decision confirms that someone in B's position will receive more holiday pay than someone working under a conventional full year contract. For example, an individual who works 35 hours every other week will receive the same amount of paid holiday as someone who works 35 hours every week.  The Supreme Court did not think that that result could be avoided, given the way the statutory scheme works – in particular the requirement that pay is worked out by reference only to the weeks in which the individual is actually working.

Holiday pay post-Harpur

The 12.07% figure that many employers of part year workers have used to calculate holiday pay, has therefore been discredited (12.07% is 5.6÷46.4, where 5.6 is the statutory annual leave entitlement and 46.4 is the number of working weeks in a year after statutory annual leave is deducted).  The Harpur case has therefore made holiday pay more expensive for part-year workers and potentially also for some casual workers, agency workers and others with irregular or unpredictable working patterns. It has also shone a spotlight on statutory provisions that seem to provide some workers with a windfall.

The Government acted relatively quickly in response to the Harpur decision and between 12 January and 9 March 2023 conducted a consultation, Calculating holiday entitlement for part-year and irregular hours workers (the 'Harpur consultation') in which it stated that it is keen to address the disparity between part year workers and others but also wants to ensure that any changes to the legislation do not have any unforeseen consequences for other parts of the legislation. The essential proposal in the Harpur consultation is to pro-rate statutory holiday entitlement, so that part-year workers and workers with irregular hours receive leave in proportion with the total annual hours they work. That proposal would require careful definition of the workers who would fall within the scope of any new rules and raises a number of other tricky technical issues. 

There is also the difficulty that many workers already have contracts that reflect the position endorsed in Harpur. Any change in the law would have no impact on existing contractual arrangements unless they were renegotiated, which could prove difficult, particularly where the workforce is unionised.

There has been no further announcement about the Harpur consultation since it closed in March and there is no timetable for the implementation of any changes. However the Government announced on 12 May 2023 a consultation on a different, but potentially partially overlapping set of amendments to the holiday and holiday pay provisions in the WTR. The consultation followed an announcement that the Government would not be implementing the automatic revocation of retained EU law at the end of 2023, but would be undertaking 'improved' regulation in some areas instead.

Key consultation proposals

There are two key proposals as regards holiday:

Merging annual leave entitlements: the consultation proposes merging the current ‘basic’ and ‘additional’ annual leave entitlements provided for under the Working Time Regulations to create a single annual leave entitlement of 5.6 weeks governed by one set of rules, with the intention of removing the burden of administering payroll systems that distinguish between the two distinct amounts of annual leave entitlement with different rules. The consultation paper also explores introducing a single rate of pay for both 'basic' and 'additional' holiday entitlement.

Rolled up holiday pay: The consultation also proposes to introduce rolled-up holiday pay, so that workers can receive an additional amount or enhancement every time they are paid to cover their holiday pay, as opposed to receiving holiday pay only when they take annual leave. Although ruled unlawful by the European Court of Justice in 2006, rolled up holiday pay is in fact widely adopted as the only practical means of calculating holiday entitlement for some workers. It has however been frowned on as an arrangement that can have the effect of discouraging workers from actually taking leave. The Government also proposes that rolled-up holiday pay is paid at 12.07%, as this is the proportion of statutory annual leave in relation to the working weeks of each year. 

The consultation states that this proposal would give employers a choice between using the existing 52-week holiday pay reference period and rolled-up holiday pay to calculate holiday pay for their workers with irregular hours. The Harpur consultation did not deal with rolled-up holiday pay itself but did propose that holiday entitlement for irregular hours workers should be calculated as 'hours worked in previous 52 weeks x 12.07%'.

The 12 May consultation is open for responses until 7 July 2023.