Given we are in peak holiday season, are you happy you are paying people correctly when they take annual leave? The Supreme Court, i.e. the highest Court in our land has just ruled on the case of a teacher whose employment contract meant that she only worked for a proportion of each year, so 32 weeks in total over 3 terms ie;- part of the year. Others might work part of the year such as a ‘season’ on a farm or on a holiday site.

The employer had calculated the entitlement using the shorthand of 12.07% of annualised hours. This number had become standardised shorthand – 12.07% being the figure obtained using the standard working weeks in a year which is 46.4 (52 weeks less the statutory 5.6 weeks holiday entitlement) and 5.6 weeks being 12.07% of 46.4 weeks).

The employee argued they should have looked at her wages during the 12 week period prior to her taking holiday to calculate her average pay over that period. This was the approach ACAS recommended for workers employed on a casual basis or with irregular hours (they have since removed this from their site).

If you used the calculation favoured by the employee, she would be paid more when she took annual leave, in fact 17.5% of her annual earnings.

Since the date of the case, under the Employment Rights Act, if a worker doesn’t have normal working hours, a week’s pay is taken to be their average pay over a 52 week period and if there are weeks in which there is no remuneration being payable such weeks are excluded from the calculation with earlier weeks brought into the reference period instead. This is since April 2020 but in this particular case, the individual was referring to a period before then when the reference period was 12 weeks, excluding the weeks on which she didn’t work).

I suspect often employers who are looking at average pay just work out average pay over the 52 week period and forget to discount weeks in which there are no earnings?

I won’t bore you with the arguments that went back and forth between the various levels of Tribunal and then the Court of Appeal before the Supreme Court but essentially, the Supreme Court has agreed with the Court of Appeal decision. The percentage method of calculation (12.07 or 17.5%) has been rejected comprehensively and should no longer be relied on. They confirmed the average wage calculation instead This should be followed even if it results in part year workers receiving a higher proportion of their annual earnings as holiday pay.

It also means that there is now a dichotomy between accrual of annual leave which accrues in proportion of the work done and pay in respect of such leave which has to be calculated by reference to remuneration during periods of actual work. When it comes to accrual, in the first and last years of employment, accrual is based purely on the passage of time under the Contract – it doesn’t have any relationship to the amount of work done in that time. Non-working weeks could be included in calculating accrued holiday entitlement but are ignored when calculating holiday pay.

In practical terms, this is likely to be problematic, mainly for schools, where somebody does not have regular working hours rather than if somebody’s salary was annualised and paid in 12 monthly instalments, they are already receiving the correct amount of pay during weeks of holiday as during working time.

For those employers who have casual workers, they need to make sure that they are using the calendar week method. If a worker takes a week’s holiday, they should be paid a week’s pay according to the statutory formula which may produce a different rate of pay each time a holiday is taken depending on what their earnings have been in the 52 weeks that they have last worked prior to the calculation being done (or the period of employment if shorter).

That still leaves us with the difficulty in expressing holiday entitlement in contracts. If a worker does a different number of hours or days each week and sometimes may work no hours at all, what does the employer say in terms of quantifying their annual leave entitlement? Here the Working Time Regulations don’t provide any clues. One possible solution as per the government guidance which sits alongside the regulations is to base it on the number of days in an average week of a representative period, e.g. if the average week is 2.5 days long then a day’s holiday equals 1 divided by 2.5 or 0.4 of a week. If the employee took 2.5 days off it would reduce their holiday entitlement from 5.6 weeks to 5.2 weeks.

It is possible that we may now see a flurry of deductions claims from workers who have had their holiday calculated on the percentage. Those claims generally have to be brought within 3 months of the final pay day or the most recent pay day that they say has been calculated erroneously and can go back for 2 years back pay from the date of the claim.

Refreshing Law
01 August 2022