The Government has launched a consultation into the way statutory holiday entitlement (‘SL’) and pay is calculated for part-year and irregular hours workers, as part of its ambition for the UK to be the “best place in the world to do business”. The consultation seeks to understand the implications of the Supreme Court Judgment in Harpur Trust v Brazel on different sectors including, agency workers with complex contractual arrangements.

Current position: Harpur Trust v Brazel

Mrs Brazel was a visiting music teacher who worked under a permanent contract that provided expressly for her hours to be worked only during term-time. Prior to 2011, Mrs Brazel received holiday pay at three different points in the school year. However, in 2011, her employer changed the way that her holiday pay was calculated and paid 12.07% of her earnings from the previous term, in accordance with ACAS guidance at the time.

The Supreme Court held that employers cannot pro-rate part-year workers’ holiday entitlement to the proportion of the year worked; part-year workers are entitled to 5.6 weeks' statutory annual leave. This means that the practice of using a ‘rolled-up’ holiday calculation for the purposes of holiday entitlement and holiday pay for part-year workers should not be calculated using the 12.07% accrual method, which has been commonly used for the purposes of calculating holiday entitlement for workers and employees with no fixed working hours. The results produced by using this method are no longer considered accurate when applied to part-year workers.

The effect of the Judgment, which looked at the correct interpretation of the Working Time Regulations, has resulted in significant difficulties for those working in sectors where part year working is common such as hospitality, recruitment and seasonal staff. The effect being that an individual who only works one week of the year but remains employed on permanent employment contract for the entire holiday year is entitled the full 5.6 weeks holiday entitlement and corresponding holiday pay for that leave. The treatment of the part-year worker, following the Harper Trust decision should be no different to that for someone who works the entire year, but works on a more regular pattern of work working fixed hours each week of the year.

Following Harpur Trust v Brazel, holiday pay is calculated using a 52-week rolling average of the workers’ weekly pay, disregarding any weeks not worked. As a result, part-year workers may be entitled to a larger holiday entitlement than part-time workers who work the same total number of hours across the year.

The Government’s proposals

In light of the difficulties caused by the decision, not only for employers, but also for employees in understanding what holiday entitlement they are required to pay, the Government has launched a formal consultation which proposes a change to the law, which would effectively reverse the law created by the Supreme Court decision and that holiday entitlement for part-year and irregular hours workers will be pro-rated to be based on hours actually worked.

The Government is keen to hear as many views as possible in relation to the consultation.

In summary, the Government’s proposals are as follows:

1. Introducing a fixed holiday entitlement reference period, based on the proceeding 52-weeks, including non-working weeks for the purposes of calculating holiday pay.
2. Legalising the 12.07% method, allowing employers to pro-rate holiday entitlement for part-year workers and irregular workers by the proportion of hours worked within the reference period.
3. For workers within the 1st year of employment, holiday entitlement will be calculated at the end of each month, using the total number of hours worked in the previous month.
4. Using a flat average method to calculate how much holiday is used in hours, by taking a particular day off.

However, the Government recognises that holiday entitlement is particularly difficult to calculate for agency workers, for example within the recruitment sector, due to their complex contractual arrangements. Some workers may not have a consistent contractual relationship with an employment business or umbrella company and therefore the 52-week holiday entitlement would be impractical in those cases.

As such, the Government has made a distinction between agency workers engaged in short assignments (less than a year) and those with a more permanent contractual relationship (exceeding a year).

For agency workers employed under a contract of employment with an umbrella company that exceeds a year (or assignment exceeding a year), holiday entitlement would be calculated using the 52-week reference above.

For agency workers on short assignments (less than a year), the Government has proposed the following:

1. When workers are on assignment, holiday entitlement would be calculated in the same way as for other irregular hours workers who are in their first year of work: the employment business or umbrella company would calculate their entitlement as 12.07% of the hours that they had worked over the previous month. The worker could then choose to take the leave during the assignment or be paid in lieu of the end.
2. When workers are not on assignment, they would not accrue leave as they are not working. These weeks would not be considered when calculating holiday entitlement for any subsequent assignments.

The Government is keen to understand how holiday entitlement is currently calculated for agency workers and how the proposals might be implemented. The consultation closes on 9 March 2023.

We anticipate that the Government’s proposals will be welcomed by employers that engage agency workers on term-time, zero-hours or irregular hours contracts, as it will bring greater clarity and simplify the calculation of holiday pay, by legalising the 12.07% method for part-year workers.

However, the consultation does not address what will happen when a worker is on sick or family leave such as, maternity leave and continues to accrue holiday entitlement. It is unclear at this stage as to what, if any, further proposals from the Government will emerge on this issue.

As it stands, employers should continue to calculate holiday entitlement and pay based on the Judgement set out in Harper Trust – in order for there to be a change, new legislation will be required. Employers who are considering changing their model and calculations may wish to see the outcome of the consultation process before making significant changes to their operation. The turnaround time for the consultation process is short, although it is an unknown how fast this will move following the close in consultation.

It would be doubtful that any of the changes that are made in the future would apply retrospectively, but if changes are made then this would change the position in respect of liability if the calculations were not in line with the current legal requirements.

If as an employer, you are yet to make any changes following the Supreme Court ruling, it is important to take legal advice to understand the ramifications for your business and what delaying this could mean for you. If you are considering making contractual changes, you may want to consider ensuring that you have the right to change this if the law changes following the consultation. If you have already made changes to your holiday accrual processes and pay, then you should keep fully abreast of the changes that could come about if the legislation subsequently changes.​​​​​​