The Supreme Court has confirmed that the 12.07% formula commonly used to calculate holiday pay for workers with irregular hours is incorrect. Using it will in some cases result in an underpayment. Employers who rely on this formula should ascertain whether it creates any material liabilities for their organisations (Harpur Trust v Brazel)
- Concerns permanent employees who don’t work every week (e.g., term-time employees). It’s also potentially relevant to permanent casual workers whose hours fluctuate (e.g., zero hours workers).
- Confirms that the 12.07% formula commonly used to calculate holiday pay for such workers is not compatible with the statutory rules and can in some cases result in an underpayment. One of the main problems with the formula is that it doesn’t ignore weeks in respect of which no pay was received, which is contrary to the statutory rules.
- Doesn’t concern workers engaged periodically on separate contracts (i.e. where they are not a worker of the employer in between engagements).
- Doesn’t change the law (the court agreed with the earlier decisions from the Employment Appeal Tribunal and the Court of Appeal) but it shines a spotlight on the issues and was the final stage of appeal.
As a reminder, 12.07% is the statutory minimum period of holidays in a year (5.6 weeks), expressed as a percentage of the number of working weeks in a year (46.4 weeks). The idea is that this percentage figure gives a shorthand for the total value of holiday pay on an annual basis. Technically, we think the correct figure is 12.03% because there are a little over 52 weeks in a year (52.14 to be precise), but this ultimately comes out in the wash as this case confirms that neither of those shorthand calculations is lawful.
Realistic, pragmatic solutions will vary for different employers, based on their workforce, working patterns and payroll systems, but one key decision will be whether employers continue to employ these kind of staff on permanent contracts. It may be preferable, if possible, to engage staff whose hours fluctuate on much shorter contracts where they are engaged for a shift at a time.
Employment team members Richard Cook and Amy Ling discuss the case, its impact, and mitigation strategies in episode 4 for of our virtual mini-series “Employment Rights: is 2022 the year of enforcement?”. Please click here to watch the video chat.
In more detail
This case – Harpur Trust v Brazel – concerned a permanent, term-time employee. She was treated as taking a third of her 5.6 weeks of statutory holiday entitlement during each holiday, and was paid for 12.07% of her hours in the preceding term.
The statutory rules on holiday pay for someone on that kind of contract said that she should be paid average weekly pay for each of her 5.6 weeks of leave based on a 12 week reference period preceding the holiday (NB this has subsequently increased to 52 weeks), ignoring weeks in which no pay was received. In one example, a term was 10 weeks, which meant that 2 weeks of pay from the previous term should have been taken into account.
The employer’s approach of using the 12.07% calculation resulted in a shortfall. The employer put forward lots of arguments in support of the 12.07% approach, including the fact that, arguably, it is a fair approach to ensuring that all workers get paid holiday in proportion to the amount of work they do. However, the court concluded that the legislation is clear and so there was no scope for adopting the 12.07% approach.
The decision in Brazel will lead to curious anomalies acknowledged by the judges, such as where employees work only a small number of hours or days in the year, but nonetheless accrue a year’s worth of leave (e.g., someone who is on a permanent contract but works only a week of the year still gets 5.6 weeks of paid leave). But it will also apply to any permanent employee with irregular hours and gaps of some weeks without work. In addition to term-time employees, this will most commonly mean zero hours employees. There is an additional problem for such employees because, unlike a term-time worker, you don’t always expressly designate a period of time as annual leave.
The most obvious solution to the Brazel issues is to designate certain weeks as holiday and use the statutory calculation for holiday pay (a weekly average based on 52 weeks, ignoring weeks of nil pay). Another solution is to consider whether permanent contracts are appropriate. The realities of workforce planning might push to a bespoke risk-assessed solution. We would be happy to analyse your organisation’s arrangements and advise accordingly.