How do you calculate holiday pay for staff who work irregular hours?

How do you work out what to pay your employees and workers who work irregular hours throughout the year? This may be your casual or “bank” employees, employees on zero hours contracts, or part time employees with variable hours.

In an important decision, the Court of Appeal in Brazel v The Harpur Trust, has confirmed that the established practice of paying 12. 07% of annualised hours is not correct. Depending on the working pattern of the individual concerned, holiday pay may need to be calculated differently.

What happened?

Mrs Brazel was employed by The Harpur Trust as a part time music teacher. She worked mostly during term time and was engaged on a zero hours contract. Her contract of employment entitled her to 5.6 weeks annual leave (in line with her statutory entitlement) and she was required to take her holidays outside of term time.

The Trust paid her 12.07% of her annualised hours for periods of annual leave. This was paid in three instalments at the end of each term. Mrs Brazel complained that this was not correct and meant that she was being underpaid during her holiday periods.

In the Employment Tribunal, the Trust maintained that taking any other approach would give Mrs Brazel an unfair windfall because she did not work for the standard 46.4 week working year (52 weeks less 5.6 weeks statutory leave). The Trust relied on ACAS guidance that supported the principle of paying 12.07% (5.6 weeks divided by 46.4 weeks) of annual hours for casual employees.

The Employment Tribunal agreed and found that to do otherwise would result in Mrs Brazel receiving circa 17.5% of her annualised hours as holiday pay, which was more than a comparable full time employee.

The appeal decisions

Mrs Brazel appealed the decision. The EAT found in Mrs Brazel's favour. It disagreed with the Tribunal’s finding that there was a need to pro-rate holiday entitlement so as to ensure full time employees are not treated less favourably or to avoid the windfall for employees such as Mrs Brazel who work fewer weeks than the ‘standard’ working year.

It found that the calculation was actually very straightforward. For someone who has no normal working hours, the correct approach is to apply section 224 Employment Rights Act 1996 and work out her normal week’s pay based on the pay received in the 12 week period prior to taking annual leave. The EAT recognised that this could produce anomalies, which might favour an employee such as Mrs Brazel who did not work throughout the year, but found that that the legislation was unambiguous.

The Court of Appeal has now endorsed this decision, holding that the Employment Tribunal that first heard the case was wrong to cap Mrs Brazel’s annual leave entitlement at 12.07% of her annualised hours. The Court acknowledged that it might at first seem surprising that workers who only work part of the year should be entitled to a greater proportion of their earnings as holiday pay than workers who worked all year round. However, it did not agree with the Employment Tribunal’s conclusion that this was necessarily unfair.

Mrs Brazel was on a permanent contract. Using the 12 week average method of calculating annual leave meant that the amount of holiday she received would reflect her actual working pattern. This approach made more sense than applying a blanket approach of paying 12.07% of annualised hours or, alternatively attempting to work out her actual pro-rata holiday entitlement in comparison to a full time employee (which in practice would be extremely difficult). In any event, the Court of Appeal confirmed, the Working Time Regulations do not make any provision for pro-rating in this way.

What does this mean for me?

We know that many employers struggle with what (and when) to pay in respect of holidays for employees who do not work regular hours, whether part time employees, casual or zero hours staff. This case demonstrates that adopting the approach of simply paying 12.07% annualised hours as holiday or increasing hourly rates by 12.07% to include an element for holiday pay (‘rolled up holiday pay’) may produce the wrong result for employees and may leave you vulnerable to claims for unlawful deductions from wages for the previous two years. Payments already made in respect of holidays will be offset against this liability.

The Court of Appeal decision confirms that the correct approach for employees who do not have regular hours of work, is to work out the average pay in the 12 week period prior to the holiday being taken.

The Court of Appeal acknowledged that this method might produce strange results in some extreme circumstances, for example where a cricket coach or exam invigilator was only required to work for a few weeks each year. However, the Court observed that it would more usual for staff in this position to be engaged on a freelance basis rather than, for example, on a zero hours contract.

Comment

In many ways this judgment is unsurprising. It is consistent with the long-running holiday pay cases concerning commission, bonus and overtime payments in which the Courts and Tribunals have found that ‘normal’ pay should be paid to employees and workers when they take annual leave. Whilst this case looked at a different issue, the principle is the same; for those who have irregular hours of work, an average of the previous 12 weeks’ pay should be paid during statutory leave entitlements.

If you have been working on the 12.07% principle, whether as an amount paid in addition to hourly rates or as the basis for holiday entitlements paid when holidays are taken, you should now assess whether there has been an underpayment and consider changing your approach for future holiday payments.