Our holiday pay webinar: more questions answered

This week around 700 delegates joined us for our webinar on holiday pay. We focused on the Supreme Court's recent judgment in Brazel v Harpur Trust which held that every worker engaged under a permanent or continuous contract is entitled to 5.6 weeks holiday, even if they only work for a few weeks or months each year.

It's a complicated issue and we received a huge number of questions (including pre-submitted ones) that we didn't have time to cover. It's safe to say that if the session had been twice as long, we still wouldn't have got through them all! So, to help you decide whether you need to change the way you calculate pay or are giving staff enough paid holiday, we have collated the most popular questions and have answered them below. 

We've not included those questions that we answered here: Holiday entitlement and pay of term-time and other part-year workers: top 10 questions answered and if you haven't read these, I suggest you start with them. 

1. We have casual staff but they are not engaged on term-time contracts. Can we ignore this decision?

The principles set out in this judgment apply to all workers. 

Holiday entitlement

The Supreme Court made it clear that all workers must receive 5.6 weeks holiday each year. You cannot pro-rate this to reflect the number of weeks someone actually works unless they start part way through the leave year or leave part way through it. For example, a worker who starts on 1 June and finishes on 31 August will be entitled to 1.4 weeks holiday (3/12ths of 5.6). 

That doesn't mean that all workers will receive 28 days paid holiday each year as this reflects the number of days' holiday a full-year employee working five days a week is entitled to receive. For example, 5.6 weeks leave for someone who works two days a week is 11.2 days holiday, and if they work seven hours a day, that amounts to 78.4 hours.    

It's easy to fall into the trap of assuming that anyone you engage on a zero hours or casual contract only has the right to receive paid holiday when they are actually working. That will not always be case. Informal working relationships encompass a wide variety of different arrangements from someone who works the odd few days or weeks (perhaps alongside working for other people) to a situation where what began as a casual relationship has changed into something more permanent (such as working every year over a specific period). 

If the evidence points to an on-going relationship between you that applies during periods where they aren't working, a tribunal can conclude that the worker is engaged under a type of 'umbrella' or 'global' contract. And, in those circumstances they would be entitled to 5.6 weeks holiday every year until that contract ended even if they are only performing work for part of the year. They may also be entitled to other important employment rights, such as the right to receive a redundancy payment or bring a claim for unfair dismissal.

Having a well written contract in place will help you to minimise these risks but it must reflect what actually happens in practice. If it doesn't, the tribunal can ignore those bits of the contract that are inconsistent with reality. 

Holiday pay

The other point to bear in mind is that the judgment also applies to pay. Specifically, how to properly calculate holiday pay for all casual workers - not just those who are on term-time contracts. 

The Supreme Court made it very clear that you can't use a mathematical shortcut to work out pay (such as the common practice of multiplying the number of hours worked in a particular period by 12.07% and multiplying that number by the hourly rate of pay).

Instead, you have to follow the provisions for working out a week's pay set out in section 224 of the Employment Rights Act 1996 which applies to workers who don't have normal hours of work. This requires you to go back 52 weeks from the period of leave, ignoring any weeks the member of staff didn't work in order to work out their average weekly pay. You can go back up to 104 weeks. If they haven't worked for you for long enough to go back 52 weeks, use what data you do have.

2. When can you use 12.07% to calculate holiday?

The Supreme Court made it clear that a worker's holiday entitlement must be based on the length of time their employment contract lasts, rather than the number of weeks they actually work. For example, someone who has worked for six months is entitled to 2.8 weeks' holiday, even if they didn't work every week during the employment contract. 

That makes the 12.07% figure problematic. Whilst it might work in some cases it's at odds with the strict wording of Regulation 15A of the Working Time Regulations which states that in the first year of employment, holiday is deemed to accrue at the rate of one twelfth at the first of each month. And, where the amount of leave that has accrued includes a fraction, it's treated as half a day.  

Some employers also use 12.07% to work out holiday accrual when a worker leaves part way through the leave year. Once someone has worked a full year, they are entitled, from day one of the new leave year,  to 5.6 weeks leave which they can take when they like (subject to complying with their employer's procedures). Regulation 14 simply states that where the proportion of leave taken by the worker is less than the proportion of the leave year which has expired, they are entitled to receive a payment in lieu. This has to reflect the length of their contract rather than the amount of work they have actually performed.  

If you intend to use 12.07% to calculate entitlement in the first and final years of employment, your contract terms should reflect this and it would be helpful to expressly state that if this results in a lower number than would apply under the WTRs you will adjust it upwards. This means that you will have to do two different calculations anyway which will defeat the objective of using a 'simplified formula'.

Best practice therefore is to stick to the wording in the WTRs.

Note: you cannot use 12.07% to calculate pay.

3. Can you still include a top up payment for hourly paid staff to represent holiday (rolled up holiday)?

Guidance produced by the UK government states: 

“Holiday pay should be paid for the time annual leave is taken.  An employer cannot include an amount for holiday pay in the hourly rate (known as ‘rolled up’ holiday pay).  If a current contract still includes rolled up holiday pay, it needs to be re-negotiated.”

Despite this, the UK courts have, in the past, approved rolled up holiday pay arrangements where:

• The parties agree that holiday pay will be rolled up in the contract; and
• The contract or pay slip clearly sets out the percentage of pay allocated to holiday (or provides sufficient details for it to be calculated)

Regulation 16(5) of the WTR's allows employers to offset any outstanding holiday pay owed to a worker at the end of their engagement by any additional money it has provided under the terms of the contract. So, in the event of a dispute, you would be able to offset what you have paid against any liability you owe.

But, you can't roll up the holiday pay of someone who doesn't have fixed hours of work. That's because you don't know in advance how much holiday pay they are entitled to. As indicated in the answer to question 1, you can only calculate holiday pay at the point the worker takes annual leave and the regulations require you to go back 52 weeks to work out their average week's pay.  

4. How do you work out holiday if a worker permanently changes their working hours part way through a leave year?

You will need to recalculate their holiday entitlement up to the point their hours change and do a separate calculation for the new hours. In practice therefore, payroll will treat them as a leaver under the old contract and a new starter under the new one (although no termination actually occurs). 

If a worker increases their hours part-way through the leave year, they are likely to be entitled to additional holiday to reflect the number of additional hours they are now working. 

5. Why are we liable for underpayments that arose before the Supreme Court reached this decision?

The Working Time Regulations were introduced to meet the requirements of the Working Time Directive (which sets out minimum standards). The Supreme Court accepted, that subject to some exceptions, EU law recognises the principle that workers are entitled to paid annual leave in proportion to the time they work. But, it said that it could not interpret the WTR's in line with this principle where the UK had chosen to adopt more generous provisions. Specifically, the WTR's do not allow employers to pro-rate the number of weeks holiday a worker receives according to their working pattern. 

You can't escape liability even if you and many others genuinely misunderstood the law or relied on guidance (such as that from Acas which said that it was “often easiest” to calculate holiday entitlement that accrues as hours are worked). 

However, in most cases, your historic liability for underpaid holiday is capped at two years.   

Still confused? 

We are producing a number of guides/resources which you can purchase which go into more detail on Brazel and holiday pay issues generally. 

Guide on holiday pay and accrual

This guidance note explains the law on calculating holiday pay for term-time workers, casual staff, those who receive paid overtime, commission, bonuses or allowances. It also provides example calculations and a checklist of issues to consider.

Back to basics module on holiday and holiday pay

This on-line learning course will benefit any HR or payroll professional who wants to understand the law on holiday and holiday pay. It covers: 

• Minimum holiday requirements, leave years, bank holidays and the difference between UK, EU and additional contractual leave (and why it matters)
• How to calculate leave entitlement in the first and final years of employment
• The correct way to calculate the holiday pay of different types of workers (zero hours/casual, salaried, those receiving paid overtime, commission and allowances)
• The circumstances where someone who is sick and hasn't taken all of their holiday can roll over their entitlement to the next holiday year
• Liability for underpayments

Free FAQ's

You can read our background to the Brazel case here. Plus, we answered 10 top questions which explained the implications of the case here. 

Free holiday calculator

The government has a calculator which helps you to work out how many days/hours of holiday your staff must receive each year. You can also use it to calculate the amount of holiday staff must receive if they start or end their engagement part way through your holiday year.

Note: it calculates this by reference to the statutory minimum of 5.6 weeks, therefore if you offer staff additional paid holiday, you will need to work this out manually.

How to get help

If you have underpaid your part-year workers, we can help you to minimise the risk of claims. We can also help you to amend contracts to make it less likely that casual workers will be deemed to work under an umbrella contract. Please contact our part-year holiday pay specialists; Jenny Arrowsmith, Helen Dyke, Charlotte Sloan or Siobhan Mulrey to find out how we can help you.

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