The Judgment of the Supreme Court in Brazel v Harpur Trust challenged the way many organisations had been calculating holiday entitlement and holiday pay for part-year workers and workers with irregular hours. Our article here sets out what the court decided and how it impacted that approach.
Employment lawyers, HR professionals and employers have since grappled with what the Judgment meant in practice and how they could mitigate the financial impact of organisations, in some cases, being legally obliged to pay high amounts of holiday pay which were disproportionate to the hours worked.
Alongside the above, over recent years the law around holiday pay and entitlement has become increasingly complex, making it hard both for businesses to apply with any certainty and for workers to understand their rights.
The Government therefore launched two consultations earlier this year to review all of these elements. It was hoped that the consultation would be the start of a journey to a simpler method of calculating holiday entitlement and pay, which is fair to both employers and workers. Those consultations have now closed, resulting in The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (the Regulations).
What did the Harpur Trust consultation seek input on?
The aim of the consultation was to gather feedback from employers and workers on a proposed method of calculating holiday entitlement and pay which would:
- Avoid workers receiving a disproportionate amount of leave compared to hours worked;
- Provide clarity to workers and employers; and
- Ensure that holiday entitlement is calculated consistently for workers with irregular hours.
What did the retained EU law consultation seek input on?
The retained EU law consultation sought input on several issues, importantly for these purposes the simplification of annual leave and holiday pay calculations in the Working Time Regulations. The two specific proposals on which the Government sought input were:
- Creating a single annual leave entitlement of 5.6 weeks; and
- Permitting ‘rolled-up’ holiday pay as a lawful means of meeting annual leave obligations.
Is the 12.07% method back?
In short, yes, as of 1 April 2024.
Accrual
The Regulations set out that for workers who have irregular hours or who are part-year workers, their holiday entitlement should be calculated at a rate of 12.07% of the hours they work. Unless a worker has been on sick leave or other statutory leave, the accrual calculation will be done on the last day of each pay period by reference to the hours worked over that pay period. Their holiday will accrue alongside the hours they work creating a pool of holiday they can then take in the same way any other worker can. The pool of leave an individual can accrue is capped at 28 days.
Pay
Pay for holiday will be calculated in line with the week’s pay rules under the Employment Rights Act 1996 which, for a worker with irregular hours, require an assessment of their average pay in the 52 weeks preceding the holiday.
Taking leave
The way in which leave is accrued appears to have been simplified by the Regulations. What is not clear is how much of a worker’s entitlement will be used up when they take leave. The approaches set out below are the ones most commonly adopted by employers:
- Work out the average hours the individual works per day (over a 52 week reference period prior to their holiday) and then for each day’s leave taken you deduct that number of hours from their accrued entitlement.
- Contractually set the number of hours which make up a “day” for the purposes of taking leave, making sure this is reasonable and not prohibitive to individuals taking leave. In reality, this will require you to estimate the number of hours you anticipate the individual working and does therefore inevitably carry more uncertainty with it.
- Give the individual the choice as to how many hours of their leave entitlement they want to use to take the holiday. There is a risk this may leave too much control with the individual and may need a crosscheck, again to ensure the number of hours proposed is reasonable.
In all cases, we’d recommend holiday entitlement for this type of worker be calculated in hours (which follows from the 12.07% approach anyway).
Rolled up holiday pay
Rolled up holiday pay refers to the practice of workers receiving an enhanced rate of pay which takes into account their holiday pay instead of the worker actually taking leave. A worker’s pay is basically uplifted by (at least) 12.07% to allow for holiday. The use of rolled up holiday is currently unlawful on the basis that it does not afford workers with the opportunity to take their leave, so they do not have the opportunity to rest and relax, which is the fundamental purpose of paid holiday.
The Regulations legalise the use of rolled up holiday and make provision for how that practice should be applied.
In theory an individual could request leave but as payment for holiday has already been made any such leave would be unpaid.
Who do these new rules apply to?
Accruing holiday in line with the 12.07% method and rolled up holiday pay can only be used for workers who have irregular hours or who are part-year workers. The Regulations contain definitions for both groups. The definition of a part-year worker appears fairly straightforward – being someone who is contracted to work only part of the year, with periods of at least a week in which they are not required to work.
The definition of an irregular hours worker might be open to more debate as it is someone whose paid hours are “wholly or mostly variable”, which leaves room for challenge.
It is important that employers carefully consider if their workers are caught by the definitions, to avoid any inadvertent breaches.
Single pot of leave?
For workers who are not irregular hours workers or part-year workers they remain entitled to 5.6 weeks’ leave. That 5.6 weeks is made up of four weeks, derived from EU law, and an additional 1.6 weeks derived from UK law. The rates of pay due under these two pots of leave are different, as the four weeks’ EU derived leave needs to be paid at a rate of “normal remuneration” whereas the rate of pay due for the additional 1.6 weeks of leave varies depending on an individual’s working pattern and how they are paid.
The Government have rejected proposals to merge the leave into a single pot and therefore the two types of leave remain, with separate rates of pay. The Regulations have however clarified what should be included as “normal remuneration” within the EU derived four weeks of leave, namely:
(a) payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract;
(b) payments for professional or personal status relating to length of service, seniority or professional qualifications; and
(c) other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
This response enshrines existing EU law in UK legislation.
Many employers pay all 5.6 weeks of leave in line with the above principles anyway, as to do otherwise could be a considerable administrative burden. However, if you do separate out the different leave entitlements and pay them at different rates then you should ensure your contracts of employment set out which type of leave is being taken first, so that you can make sure the right rates of pay are applied.
The Government has warned that they are considering more fundamental reforms to the rate of pay – so watch this space.
What else is included in the Regulations?
The Regulations restate principles derived from existing EU law including the entitlement to carry over annual leave if maternity/family-related leave or sick leave prevents the worker from taking it.
The Regulations also introduce a method of accrual of annual leave for irregular hours and part-year workers when they have had other periods of maternity/ family related leave or sick leave.
What should you be doing now?
In light of the Regulations this would be a good time to review your current holiday pay practices to ensure they are in keeping with the law as it will be as of 2024. Notwithstanding the Harpur Trust decision, many employers, often for administrative and commercial reasons, continued to use their existing methods, which might have included rolled up pay and using the 12.07% accrual method. They might not need to take much action. However, some employers will have moved to the more generous entitlements under the Brazel v Harpur Trust decision and may now wish to return to their previous practices.
If you are seeking to change workers contractual terms then this needs to be done with care and we can advise further as to the best approach for my business. Please contact our Employment team to discuss how we can help you.