Supreme Court clarifies holiday pay for employees with irregular hours

The Supreme Court has ruled the correct method to calculate holiday pay entitlement for an employee with no fixed working pattern, namely, on the basis of average weekly pay over a 12-week reference period ignoring weeks not worked. This may result in such employees receiving a proportionally greater entitlement than full-time employees.

Here, we provide a brief overview of the conclusion reached by the Supreme Court on the holiday pay calculation saga and offer our initial observations on the outcome.

Background

The Harpur Trust is a UK charity which, amongst other functions, operates multiple schools.

The claimant was employed as a part-time music teacher on a zero-hour contract. The claimant did not work every week. A dispute arose between the parties as to the correct means of calculating the claimant’s holiday pay entitlement.

The claimant was contractually entitled to the full-time equivalent of 5.6 weeks’ annual leave which the claimant was required to take during school holidays. The respondent calculated the claimant’s holiday pay entitlement as 12.07% of the hours worked during a term. The claimant was paid holiday pay in three instalments at the end of each term.

Working Time Regulations 1998 (WTR)

Under Regulations 13, 13A and 16 of the WTR, an employee is entitled to 5.6 weeks’ annual leave and additional annual leave in each year.

Employment Rights Act 1996 (the 1996 Act)

Under Section 224 of the 1996 Act:

1. This section applies where there are no normal working hours for the employee when employed under the contract of employment in force on the calculation date.
2. The amount of a week's pay is the amount of the employee's average weekly remuneration in the period of 12 weeks ending –
   1. Where the calculation date is the last day of the week, with that week.
   2. Otherwise, with the last complete week before the calculation date.
3. In arriving at the average weekly remuneration no account shall be taken of a week in which no remuneration was payable by the employer to the employee and remuneration in earlier weeks shall be brought in so as to bring up to twelve the number of weeks of which account is taken.

The claim

The claimant brought a claim in the Employment Tribunal (Judgment was sent to the parties on 15 January 2017) alleging that:

• Her holiday pay should have been calculated using the 12-week averaging method set out in the WTR, ignoring weeks where no hours were worked (the Calendar Week Method).
• There was no requirement for the respondent’s practice to pro-rata her holiday pay, on the basis of 12.07% of the hours worked during the term.

The respondent’s case was that the statutory entitlement to 5.6 weeks’ holiday pay per annum should, in the case of an employee who works during fewer weeks than a ‘standard’ 46.4 week working year, be pro-rated so that the entitlement to holiday pay is based on the number of weeks actually worked as a proportion of 46.4 weeks (i.e., 12.07% of hours worked in a given term). In the claimant’s case, she worked between 32 and 35 weeks per annum as the school year varied. The justification for this position was that domestic provisions should be interpreted so as to comply with the case law of the Court of Justice of the European Union which the respondent referred to as the ‘conformity principle’. This was to avoid a scenario where a part-time employee was treated more favourably than a full-time employee.

The respondent’s position was accepted by the Employment Tribunal. The claimant appealed.

The Employment Appeals Tribunal held that there was no requirement on the respondent to pro-rata in the case of an employee with a variable work pattern so that full-time employees were not treated less favourably. The Employment Appeals Tribunal held that the purpose of the legislation was to ensure that part-time workers are not treated less favourably. The claimant’s appeal was upheld, and the case was remitted to the Employment Tribunal to calculate the claimant’s loss.

The respondent appealed the decision. The Court of Appeal dismissed the respondent’s appeal concluding that the respondent was wrong to pro-rata the calculation of the claimant’s holiday pay and that the means of calculation set out in the WTR and the 1996 Act were appropriate.

The respondent appealed against this decision to the Supreme Court.

Supreme Court decision

The Supreme Court has unanimously dismissed the appeal, agreeing with the position taken by the Court of Appeal, namely that the Calendar Week Method was the appropriate method of calculating the claimant’s holiday pay entitlement. The court’s reasons are as follows:

• Although EU case law suggests that minimum entitlements under the Working Time Directive (WTD) are calculated on the basis of work actually carried out, the WTD does not prevent a more generous provision being made by domestic law.
• Even if under the Calendar Week Method, the claimant (as a part-time worker) receives a proportionately greater leave entitlement than full-time workers, this is compliant with the WTD.
• There is nothing in the WTR (the domestic regulations implementing the WTD) which indicates that the regulations should be construed so as to permit the alternative methods of calculating pay that have been adopted or proposed by the respondent.
• Aspects of the respondent’s proposed methods are directly contrary to what is required by the statutory wording and the WTR.

Comment

This judgment has ramifications for employers with employees and workers on zero hours contracts with no fixed working pattern across a wide range of sectors. Employers in the education, hospitality, retail, health and social care sectors are more likely to be impacted.

Many employers will be calculating holiday pay entitlement on a pro-rated basis (i.e., 12.07% of hours worked) in line with previous ACAS guidance (since amended). Employers will now be required to review their practices in respect of the calculation of holiday pay for part-year workers. This will involve individually calculating the holiday pay entitlement of part-year workers and employees on the basis of the Calendar Week Method.

This may leave part-year employees and workers with a holiday pay entitlement that proportionally exceeds that of full-time equivalents.

However, this judgment relates to the specific circumstance of employees and workers with no fixed working pattern. In general, the pro-rata basis of calculation should continue to be an appropriate basis to calculate holiday pay entitlement for full-time and part-time employees with a fixed working pattern.