Employment Law Coffee Break | Holiday pay, employment status, menopause and our July pensions spotlight

UK Supreme Court rules on 'part-year' workers' holiday pay

The Supreme Court published its decision in Harpur Trust v Brazel on 20 July looking at the statutory holiday entitlement under the Working Time Regulations (WTR) of Mrs Brazel, a music teacher engaged on a zero-hours contract to provide music lessons during school-term times. Under the WTR, a worker is entitled to 5.6 weeks' of paid annual leave each year (subject to some specific exceptions); however, the question arose as to whether a worker in the position of Mrs Brazel, who worked only some weeks of the year, was entitled to a full 5.6 weeks paid leave or whether this should be pro-rated to reflect the period she actually worked.

The Supreme Court agreed with the Court of Appeal that, under the WTR, Mrs Brazel was entitled to 5.6 weeks of paid holiday each year (albeit that this meant that she, in fact, received proportionately more paid holiday than a colleague who worked on a full-time basis) and that her holiday pay for this period should be calculated in accordance with the formula provided by the WTR as set out in the Employment Rights Act 1996; that is, it should be based on an average week's pay (which the WTR now provide to be based over a 52-week working-week average) times 5.6 weeks. The Supreme Court referred to this as the Calendar Week Method. Importantly, this methodology preferred by the Supreme Court does not take into account weeks where no remuneration was payable, thereby increasing the average pay for workers who, for example, only work occasional weeks within a relevant period.

Rejecting the employer's contention that the Calendar Week Method leads "to an absurd result", the Supreme Court recognised that "a construction which leads to an absurd result is, in general, unlikely to be what Parliament intended" but it did not "regard any slight favouring of workers with a highly atypical working pattern as being so absurd as to justify the wholesale revision of the statutory scheme which the [employer's] alternative methods require." 

The Supreme Court rejected other methods of calculating holiday pay, including multiplying earnings by a factor of 12.07% (which seeks to take into account how statutory leave relates to a working year) and which had been previously recommended in Acas (the Advisory, Conciliation and Arbitration Service) guidance but has since been removed. While many employers have continued to use the 12.07% method to calculate holiday pay for individuals working irregular hours, the Supreme Court was clear in its conclusion that "in short, the amount of leave to which a part-year worker under a permanent contract is entitled is not required by EU law to be, and under domestic law is not, prorated to that of a full-time worker". 

The judgment confirms the existence of a new category of worker – a "part-year worker" – who is someone who works varying hours during certain weeks of the year, but remains employed throughout the relevant period. This is different to someone who is part-time, in the more normal sense, who will work a certain number of hours during every week of the year (unless they are on holiday). The principles do not apply to part-time workers per se – just part-year workers. Employers will now need to revisit their contractual arrangements and holiday-pay calculations for part-year workers, as well as understanding any existing liabilities for unlawful deduction of wages and/or under the WTR.

Listen to Olivia Sinfield, Partner in our Employment team, speaking about this decision on Radio 4 last week and please read our fuller update here.

Employment status: government response and new guidance

The government has published its response to its consultation on "Employment Status". Dismissing any wholesale change, the government considers that the "benefits of creating a new framework for employment status are currently outweighed by the potential disruption associated with legislative reform". While in the Good Work Plan (2018) the previous government committed to legislate to improve the clarity of employment status tests and to work towards alignment between rights and tax, since then "the UK labour market has evolved, the country has faced an unprecedented economic challenge as a result of the coronavirus pandemic and significant uncertainty in the global economy has led to increased costs for businesses".

Key points from the response include:

• The UK's current three-tiered employment status framework for rights will not be changed as it "provides the right balance" for employers and individuals, while ensuring workers in more casual employment relationships have core protections such as the minimum wage and the right to holiday pay. This has been reinforced by a Supreme Court judgment which upheld that subject to relevant conditions being met, individuals in the gig economy can be entitled to the same employment rights and protections as "limb (b)" workers in other parts of the economy.
• Employment status guidance has been published for employment rights including: guidance for HR professionals, legal professions and other groups; support for individuals; and an employment status and rights checklist for employers and other engagers. The intention is that this guidance will "make it easier for individuals to work out their own status while ensuring that the employment status remains flexible and continues to adapt to modern working practices".
• The Calculating the Minimum Wage guidance is being updated to provide clarity for businesses and individuals on the correct legal interpretation of working time for National Minimum Wage purposes for platform workers. Individuals working in the gig or platform-based economy will be entitled to the minimum wage if they are considered a worker for minimum wage purposes.
• Delays in the Employment Tribunal System are being addressed through deployment of a greater range of judicial expertise and measures which include a greater use of virtual hearings, combined with a recruitment drive. It is hoped that this will "provide speedier resolution of cases for businesses and individuals alike".
• For a number of reasons, including the "lack of consensus around alignment, the ongoing economic recovery from the pandemic and the wider economic context", the government has decided now is not the right time to bring forward proposals for alignment between the employment status framework for employment rights and taxation. It will however be working "closely with stakeholders to explore longer term options to improve the employment status tax system to make sure it is as clear as possible and usable for all parties".   
• A commitment to monitoring of changes and working with stakeholders to ensure that the employment status frameworks remain fit for purpose.

It is clear from the government's response that to its mind "now is not the right time to overhaul the employment status frameworks for rights and tax" but instead it is focusing on "delivering greater clarity around the frameworks for individuals and employers by publishing guidance for status and working time for minimum wage purposes". The response indicates that it is mindful that while legislative reform could help bring clarity in the long term "it might create cost and uncertainty for businesses in the short term" at a time when many employers are still recovering from the pandemic. However, businesses should note the government's commitment to monitoring changes and working with stakeholders to ensure that "the employment status frameworks remain fit for purpose and uphold their policy intent", including employment status "is fairer and fit for modern ways of work, and building a high skilled, high productivity, high wage economy" delivering on the government's ambition "to make the UK the best place in the world to work and grow a business".

Menopause and the workplace

The government has published its response to the Independent Report on Menopause and the Workplace issued in November 2021. The response confirms that there will be no changes to the Equality Act to introduce specific protection for menopause as an additional protected characteristic; sex, age and disability are all characteristics that already provide protection against unfair treatment of employees going through the menopause.

The response notes the importance Employer Assistance Programmes provide in offering support to employees regarding their mental health and wellbeing, but recognises that it is not possible for all employers to offer this service, especially in smaller businesses. The government is therefore exploring options for additional support for women’s reproductive health issues within the workplace, including menopause, through the Health and Wellbeing Fund. The UK Menopause Taskforce will also be working with employer groups to understand how to promote best practice for supporting people experiencing the menopause at work.

Read more on menopause in the workplace and the rise in Employment Tribunal claims resulting from menopause in our earlier Coffee Breaks here and here.

Pensions spotlight for July: which is better, a registered group life trust or an excepted group life trust?

Many employers provide death in service life insurance cover for their employees, with the aim of providing a tax free lump sum (generally as a multiple of basic salary) to the employee's dependants if the employee dies in service.

It is important that the death in service benefit is provided under a trust to enable the lump sum payment to be tax free.  The trustees hold the insurance policy and pay out the insurance proceeds in accordance with the trust's rules, exercising discretion over who receives all or part of the lump sum benefit. In a standalone death benefit trust (also called a group life trust or group death in service scheme), the trustee is often the employer itself.

There are two types of standalone death benefit trust, a registered group life trust and an excepted group life trust. In some ways they are similar. For example, in both cases you need a trust deed and a trustee. There are, however, some important differences. For example, lump sum benefits paid under a registered group life trust reduce the employee's lifetime allowance, but lump sums paid under an excepted group life trust do not. Joining a registered group life trust can trigger loss of an employee's lifetime allowance protection, but joining an excepted group life trust will not. There are also particular rules and corporation tax and inheritance tax considerations that employers who are considering an excepted group life trust need to be aware of.

The government has frozen the level of the lifetime allowance until 2026. This means that excepted group life trusts could be increasingly attractive as way of providing group-wide death in service benefits, particularly for higher earners. They have a number of "higher maintenance" features when compared to registered group life trusts, but these are manageable with prior planning and some professional advice. Ultimately, what is right for each employer is likely to depend on the nature of the workforce.

We can help with much of the advice and documentation needed to set up, amend or wind-up a group life trust. We can also advise on the enquiries the trustee should make and how it should go about exercising its discretion following the death of a member. 

Some insurers offer master trust arrangements (which can be either registered or excepted), whereby the employer becomes a participating employer in a multi-employer group life trust managed by a trustee appointed by the insurer. If you are considering a master trust arrangement, we can help with a legal review of the deed of participation you will be asked to sign and of the master-trust documentation. We can also advise you on your responsibilities and liabilities under that trust.  

If you would like to discuss any of these points, please contact Claire Rankin, a Partner in our Pensions team.