Government consults on reversing Supreme Court holiday pay ruling

Employers will recall that in 2022, the Supreme Court in the case of Harpur Trust v Brazel produced a decision that highlighted an anomaly in the calculation of holiday entitlement for part-year employees, or those working irregular hours across the year.

In summary, the Supreme Court said that:

• The 12.07% accrual method for calculating both holiday and holiday pay was no longer good law (as it had never been consistent with laws on holiday accrual and pay);
• Zero hour employees on permanent contracts have an automatic right to 5.6 weeks holiday (and therefore 28 days holiday) regardless of the amount of time they work throughout the year; and
• Holiday pay for zero-hours and part-year employees who take their 28 days of leave needs to be calculated based on their average weekly remuneration in the relevant reference period preceding the holiday (excluding any non-working weeks). At the time of the case this was 12 weeks, and has since been increased to 52 weeks.

The decision left employers with significant cost implications where they engage zero-hours and part-year employees on a permanent basis, seemingly offering a holiday windfall to those who work part-year – with proportionately more holiday (and holiday pay) than someone who works the full year.

Why are the Government consulting?

Keen to address the disparity to ensure that holiday pay and entitlement received by workers is proportionate to the time they spend working, the Government have launched a consultation that will end on 9 March 2023. It seeks to understand the implications of the judgment on different sectors including education (where it anticipates 37% of the population of employees are affected by the decision), retail, health, agency workers and others who have complex contractual arrangements. The Government is keen to gather views from as many stakeholders as possible.

Key proposals of the consultation

The key proposals floated in the consultation address the following points:

Accrual of holiday

The Government proposes that statutory annual leave entitlement for part-year workers and workers with irregular hours should be calculated using the following two steps:

1. Calculate the total hours a worker has worked in the previous 52 weeks (the reference period), including those weeks without work; and

2. Multiply the total hours worked by 12.07% to give the worker’s total annual statutory holiday entitlement in hours.

(This would change the current stance, where weeks not worked are excluded from the accrual calculation and the 12.07% calculation is not in line with current holiday laws);

The reference period –

The Government proposes that the holiday entitlement reference period should be “fixed”, so that at the beginning of a new leave year, the worker’s holiday entitlement would be calculated based on the previous 52 weeks. This would give a worker a fixed pot of annual leave that they would then be able to draw from throughout the leave year, in line with how the legislation works for workers with regular hours. A significant benefit of this method is the clarity it would provide to workers on irregular hours and their employers on holiday entitlement.

The alternative proposal is a “floating”, or rolling, reference period, which would appear to create the risk of an employee not understanding exactly how much holiday they could take at a particular time.

Calculating holiday for one day of leave-

The Government proposes using a reference period to work out an average number of hours to equate to a days’ leave, rather than adopting a more burdensome approach of working out how many hours are required to take a specific day of leave (i.e. if an employee happened to work fewer hours on a Wednesday than on a Monday, they would still need to use the same number of hours leave, regardless of which day off they intended to take).

Should employers make changes now?

It is interesting that some of the methodology proposed – eg working out holiday entitlement in hours rather than weeks, is something that has already been adopted in practice.

Many employers will have already taken steps to remedy holiday pay for those members of staff who work part-year following the Supreme Court decision, or will be in the process of doing so. As it stands, the Supreme Court decision remains binding law and legislation will be required to alter the current method of holiday pay calculation. Despite the short turnaround time for the consultation, which is quick for employment law legislation, it is not known how much momentum will remain once the consultation closes. Nevertheless, the consultation offers hope that the disparities will be addressed.

If made, it is unlikely that any change in law will be retrospective, but what it does offer, assuming these proposals do become law, is an end date for accrued liabilities.

Employers therefore considering whether to make changes, or hold fire on doing so, should consider taking legal advice to understand their existing liability and whether to delay changing their contractual arrangements. If they do make changes, they should probably try to reserve the right to change them if the law changes (again). Those that have implemented changes can be assured that they are acting in compliance with the current law but will want to keep a watchful eye on developments arising as a result of the consultation and any legislative changes subsequently introduced.

Although this consultation is technical in nature, the right to annual leave is one that applies to millions of workers across Great Britain. Responses can be made using this link. Be sure to have your say!