Harpur Trust v Brazel: Consultation proposes tidy-up of complex holiday pay rules

In light of this, the Department of Business, Energy and Industrial Strategy (BEIS) has launched a public consultation on changing the method used to calculate the holiday entitlement of part-year and irregular hours workers.

The Harpur Decision

In Harpur Trust v Brazel the Supreme Court held that part-year workers on permanent contracts are entitled to 5.6 weeks paid annual leave, which should not be pro-rated according to the number of hours they work.

Key impacts of the Harpur are that:

• part-year workers may receive a greater holiday entitlement than part-time workers who work the same total number of hours across the year
• workers who work only a few weeks in a year may receive a holiday entitlement that is disproportionate to the hours they work.

The proposals in the consultation paper are intended to address these disparities and to make the law easier to understand and comply with.

The ‘Holiday entitlement reference period’

Essentially, the government intends to override the Harpur judgement by amending the Working Time Regulations (WTR) to allow employers to pro-rate a part-year worker’s holiday entitlement to reflect the number of hours work they do in the year.

The consultation proposes to introduce a new 52-week holiday entitlement reference period for part-year and irregular hours workers. This reference period would include weeks in which no work is performed. This would ensure that holiday pay and entitlement received by workers is proportionate to the time they spend working during the year.

Holiday pay (as opposed to holiday entitlement) is already calculated using a 52-week reference period (although any weeks in which no work is performed are ignored for the purposes of this calculation, and replaced with earlier paid weeks, going back no further than the previous 104 weeks). It is not proposed that this will change.

The consultation suggests that the holiday entitlement and holiday pay reference periods should be equal in length for consistency. However, this does not mean that employers would necessarily use the exact same 52 weeks of data to calculate holiday entitlement and pay for an irregular hours worker. It is proposed that the holiday entitlement reference period will be a fixed period of the preceding 52 weeks. However, the holiday pay reference period may stretch back beyond that, to take in the last 52 weeks in which the worker actually performed work.

The consultation document acknowledges that this proposed approach will mean that the holiday entitlement and holiday pay reference periods ‘diverge slightly in their operation’ but ‘will more closely align workers’ holiday entitlement with the time they spend working’.

The calculation

The government proposes a two-step method of calculation for working out holiday pay entitlement as follows:

• Calculate the total hours a worker has worked in the previous 52 weeks, including those weeks where no work is performed (the ‘holiday entitlement reference period’)
• Multiply the total hours worked by 12.07% to give the worker’s total statutory annual leave entitlement in hours.

The consultation document sets out some useful worked examples to show how this might operate in practice.

12.07% will be a familiar figure to employers of part-year/irregular hours workers. It represents the statutory entitlement of 5.6 weeks annual leave, expressed as a percentage of the remaining 46.4 working weeks in the year (5.6/46.4 x 100).

A ‘fixed pot’ of leave

The consultation also proposes that, at the beginning of a new leave year, an employer should be able to set a fixed annual leave entitlement for a part-year/irregular hours worker, based on the previous 52-week leave year.

This would be much easier to manage and understand for both parties than the current position (where employers know that part-year/irregular hours workers are entitled to 5.6 weeks annual leave for the coming year – but cannot know ‘in advance’ how many days or hours leave this entails).

Workers with less than 1 year service

The 52-week holiday entitlement reference period assumes that a worker has been engaged for at least 52 weeks. The consultation proposes an accrual-based system to work out holiday pay in the first year of employment.

Put simply, holiday entitlement should be calculated at the end of each month based on the hours worked in that month. Again, the total hours worked in the month should be multiplied by 12.07% to make sure that entitlement is proportionate to time worked.

This method would only be required for the first year of employment until the 52-week holiday entitlement reference period could be used.

Agency workers

The consultation seeks to understand the implications of the Harpur judgement on different sectors, ‘including agency workers who have complex contractual arrangements.’ It is acknowledged that a 52-week holiday entitlement reference period would be impractical in most cases due to the nature of agency work.

Broadly, the consultation proposes that, when agency workers are on assignment, they should accrue leave in the same way as workers in their first year of employment (see above). This would enable agency workers to take leave and be paid for it during an assignment, rather than waiting for payment in lieu when the assignment ends. For shorter assignments, agency workers might prefer to take their annual leave at the end of the assignment or receive payment in lieu. However, in either case, they would receive holiday entitlement proportionate to the time spent working.

Comment

It is important to note that these proposals may change following consultation and may not become law in their current form, or at all. It will be interesting to see how stakeholders respond to the consultation, and whether a clear consensus view emerges.

However, our initial view is that the proposed changes would bring some welcome clarity to the law on this issue and would make holiday pay rules simpler for most employers to operate.

A return to calculating holiday entitlement using a 12.07% factor may be frustrating to employers who have already changed their practices following Harpur. However, we know that many employers of part-year/irregular hours workers prefer to calculate holiday in entitlement in hours and have been struggling with the fact that there is no single, clear legislative mechanism to express in hours the 5.6 weeks leave posited by Harpur, for individuals with fluctuating working patterns. The consultation proposals would largely solve that problem.

It also feels fairer and more logical for some element of pro-rating to apply to the holiday entitlement of part-year workers, to put them on par with part-time workers who work throughout the year.

Overall, the government’s proposed calculation method is likely to result in a lower holiday pay bill for employers than the method set out in Harpur, especially those employers who engage part-year workers who work very infrequently.

While determining an individual’s annual leave entitlement at the start of the leave year, based on the previous year’s working pattern, provides clarity, it may prove unpopular with workers and their representatives. If, for example, a worker significantly increases their hours, their holiday entitlement will not reflect that and, arguably, may allow insufficient time for rest and recovery. However, the tone of the consultation document suggests that such considerations may ultimately take second place to clarity and simplicity.

The consultation closes on 9 March 2023 and is available in full online.