The Court of Appeal has ruled that workers or employees on permanent contracts who only work for part of the year (such as term-time only workers) are entitled to 5.6 weeks holiday per year, even if they do not work for the whole year. This is a minimum entitlement which should not be pro-rated. The ACAS guidance on calculating holiday pay will need to be amended following this decision (Brazel v The Harpur Trust (UNISON intervening)  EWCA Civ 1402)
The Working Time Directive (WTD) sets out employees' basic entitlement to holiday, which is implemented in the UK law by the Working Time Regulations (WTR). Under Regulations 13 and 13A WTR, workers are provided with 5.6 weeks (28 days) of holiday each year. When calculating payment for that holiday:
- Regulation 16 of the WTR sets out the right to holiday pay "at the rate of a week's pay in respect of each week of leave"; and
- Section 224 of the Employment Rights Act 1996 (ERA) outlines that "a week's pay" for employees with "no normal working hours" should be calculated by looking at the employee's average remuneration over the last 12 weeks they have worked and been paid for.
In the ACAS guidance booklet titled "Holidays and holiday pay", ACAS suggests that if "a member of staff works… irregular hours, it is often easiest to calculate holiday entitlement that accrues as hours are worked. The holiday entitlement of 5.6 weeks is equivalent to 12.07 per cent of hours worked over a year. The 12.07 per cent figure is 5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks – 5.6 weeks). The 5.6 weeks are excluded from the calculation as the worker would not be at work during those 5.6 weeks in order to accrue annual leave."
Separately, the EU Part-Time Workers Directive (PTWD) specifies that employers should not discriminate between part-time workers and full-time workers and that "where appropriate, the principle of pro rata temporis" should apply. The PTWD is implemented in the UK through the Part-Time Workers Regulation (Prevention of Less Favourable Treatment) Regulations 2000 (PTWR).
The Claimant was a clarinet and saxophone teacher employed by the Trust on a permanent zero hours contract. During term-time, her hours of work were dependent on the number of pupils that needed a tutor for those instruments. During school holidays, she was not required to teach any lessons or carry out any duties.
The Claimant was paid monthly on an agreed hourly rate according to hours worked, similar to a shift worker. Her contract specified she was entitled to 5.6 weeks' paid holiday each year but that this holiday had to be taken during the 3 main school holidays at Christmas, Easter and Summer. The Trust used the guidance issued by ACAS to calculate the Claimant's holiday pay. It calculated her earnings over a term and then paid her 12.07% of that figure at the end of each term. However, the Claimant argued that this was incorrect and resulted in an underpayment.
What did the Employment Tribunal and Employment Appeal Tribunal (EAT) say?
The Claimant claimed that the Trust's method of calculating her holiday pay (advocated by the ACAS guidance) left her with less holiday pay than she was entitled to if her pay been calculated in accordance with s224 ERA (using her average pay over the previous 12 weeks). However, the Trust argued that their approach was necessary to give effect to a principle of pro-rating which underpinned the legislation in this area through the PTWD.
The Employment Tribunal dismissed the Claimant's claims, ruling that applying the 12.07% to either the length of the holiday entitlement or to the Claimant's average pay over the course of the working year would give her proportionally the same holiday pay entitlement as a full-year worker. However, the Claimant successfully appealed this decision at the EAT, where the EAT held that there was no reason to depart from the plain language set out in section 224 ERA or to look into pro-rating.
The Trust appealed to the Court of Appeal on the basis that the pro-rating of the Claimant's holiday pay entitlement was necessary to protect the principles set out in the PTWD. (The Trust had to rely on the PTWD because there is no pro-rata principle in our domestic WTR).
What did the Court of Appeal say?
The key issue was whether or not the Claimant should receive less than her entitlement of 5.6 weeks leave to reflect the fact she does not work throughout the year.
The CA considered the principle of pro-rating in detail and EU case law on this topic, but concluded that there was "no requirement as a matter of EU law to give effect to the pro rata principle, or, more particularly, to pro-rate the entitlement of part-year workers to that of full-year workers."
The CA agreed with the EAT that there was no reason to depart from the plain language set out in Regulation 16 WTR and s224 ERA. Therefore, workers should receive their 'normal pay' when they take a holiday, and, in the case of those whose pay varies, this had to be averaged over the previous 12 weeks. The CA concluded that applying the 12.07% formula was therefore wrong.
This decision means that any employers who currently work out the holiday entitlement of permanent part-year workers (such as term-time only workers) based on hours/weeks worked will now need to change how they calculate this, to ensure that those workers receive a blanket 5.6 weeks paid holiday per year. This will still be the case even if those workers only work a few months a year (the CA acknowledged that adopting the straightforward approach may produce some "odd results" in "extreme circumstances) and will, inevitably, increase costs.
However, the decision will not affect permanent part-time staff, because their 5.6 weeks holiday already reflects the hours or days that they actually work each week (i.e. someone who normally works 3 days/week is entitled to 16.8 days leave) and employers can still continue to apply the 12.07% formula for casual staff.
Given that the reference period to be used for calculating holiday pay for workers with variable pay is due to increase from 12 weeks to 52 weeks on 6 April 2020 (when the Employment Rights (Employment Particulars and Paid Annual Leave) Regulations 2018 come into force), this decision and the fact that we expect ACAS to reissue its guidance on this topic in the near future, it would be sensible for employers to revisit and conduct a quick health check of holiday policies before the year is out.