UK government consults on calculating holiday entitlement for part-year and irregular-hours workers

Last year's Supreme Court decision in Harpur Trust v Brazel left staffing companies and their clients potentially having to pay more holiday pay for "part-year" and "irregular hours" workers than for normal employees working the same aggregate number hours, and some now face the possibility of retrospective liability even where they followed Acas guidance on the topic.  

The government has published a consultation on proposed changes to the statutory regime for calculating holiday entitlement for part-year and irregular-hours workers to ensure that "holiday pay and entitlement received by workers is proportionate to the time they spend working". If implemented as proposed, this would effectively reverse the effects of Harpur Trust v Brazel. The consultation closes on 9 March 2023.

Holiday entitlement

The Supreme Court judgment in Harpur Trust v Brazel had broad implications, holding that under the Working Time Regulations 1998 (WTR) a part-year worker, such as Mrs Brazel, who was engaged on a permanent contract during a full-leave year but worked only part of the year (in her case during school term times) is entitled to 5.6 weeks of paid holiday each year. When calculating what equated to 5.6 weeks, the court stated that both working and non-working weeks should be taken into account; that is, the worker did not just accrue holiday entitlement when working, but they also accrued holiday entitlement between their assignments.  

It was not clear from the Brazel decision as to how 5.6 weeks would be calculated and what sort of reference period or approach would be considered acceptable by the courts.

Impact of Brazel

The impact of the Supreme Court decision means that permanent part-year workers, umbrella company workers and staffing company workers engaged on an overarching contract of employment or of service potentially gain a greater statutory holiday entitlement under the WTR than their full-time and part-time colleagues (when comparing time actually worked in a relevant holiday year). The government estimates that between 320,000 and 500,000 permanent term-time and zero-hours contract workers and between 80,000 and 200,000 agency workers could benefit from the Supreme Court's decision. 

This is a serious problem for many users and suppliers of permanent part-year workers, umbrella company workers and agency workers engaged on overarching contracts of employment of service. The cost of supply of certain types of worker is not materially higher and many employers and engagers face material retrospective liabilities. Many are taking steps to minimise this by reframing how relevant workers are engaged.

Holiday pay

In terms of calculating holiday pay for those who did not have regular working hours, statute provided that holiday pay should be based on the worker's average pay, which is calculated using a 52 week reference period, but only taking into account weeks for which remuneration was due (including weeks where the individual is not working but is on paid sick leave or annual leave). The Supreme Court referred to this as "the calendar week method". 

However, rather than follow the calendar week method, many employment businesses use what is referred to as the "percentage method" through which statutory holiday entitlement for part-year workers would be pro-rated so that it was proportionate to the amount of work actually performed.

This was an approach which had been previously set out in Acas guidance and adopted by Mrs Brazel's employer. It involved determining a worker's holiday pay by essentially multiplying earnings by 12.07%: this figure represented the percentage of statutory holiday (5.6 weeks) in a standard working year (46.4 weeks being 52 weeks minus 5.6 weeks) for a permanent regular hour worker (5.6 weeks/46.4 weeks x 100% = 12.07%). 

The Supreme Court found that the percentage method to holiday pay was not lawful, and that the calendar week method should instead be used.

Consultation focus

The government has stated in its consultation paper that it is "keen to address this disparity to ensure that holiday pay and entitlement received by workers is proportionate to the time they spend working".

It has, therefore, launched a consultation to look into the issue of holiday entitlement with a number of options. It is not consulting on the issue of calculating holiday pay.  

Legislative reform is proposed to enable employers and engagers to pro-rate holiday entitlement for part-year and irregular hours workers so that "they receive leave in proportion with the total annual hours they work". 

The government considers the simplest way to pro-rate holiday entitlement for part-year and irregular hour workers would be to introduce a 52-week holiday entitlement reference period for such workers and its preference is that this new reference period would "use the most recent 52 weeks, including those weeks without work". 

Under this preferred proposal, a worker's statutory annual leave entitlement would be calculated taking the total hours a worker has been engaged in the previous 52 weeks, including weeks without work, and then multiplying those hours by 12.07% to bring the worker's statutory holiday entitlement proportionately in line with that of permanent regular hour workers. 

If this proposal is adopted, the government also recognises that a system would be needed for those workers in the first 12 months of a job while their reference period builds up; a proposal is that holiday entitlement would be calculated at the end of each month based on multiplying the actual hours worked in the month by 12.07%. Employers and engagers could use their discretion to allow a worker to take more annual leave than they had accrued in advance. 

The alternative position would be to retain the status quo (with its acknowledged shortcomings).

Calculation interaction

How would this method of calculating holiday entitlement interact with the calculation of holiday pay? Under the proposal, the reference period for calculating holiday entitlement would be 52 weeks including any non-working week. However, the reference period for calculating holiday pay would be the last 52 weeks in which pay was due (excluding any non-working weeks or weeks when the worker was not on annual leave or paid sick leave). This means the 52-week reference period for holiday entitlement and holiday pay will be different.

The significance of this is that, while the proposal would make it lawful to calculate holiday entitlement based on the 12.07% calculation, it would not make it lawful to calculate holiday pay using the same calculation. Actual holiday pay due for holiday accrued would still be calculated as an average of pay over the previous 52 working weeks.

Fixed pot 

As part of these proposals, the government is seeking views on whether the new 52-week holiday entitlement reference period should be a fixed pot of annual leave on which a worker can draw. At the beginning of a new leave year a worker's holiday entitlement is calculated on the previous 52 weeks, or whether a rolling 52-week period should be adopted. While the consultation considers the pros and cons of each, the government's preference is for a fixed period giving a worker "a fixed pot of annual leave that they would be able to draw from throughout the leave year", as well as being in line with how the legislation works for those with regular hours, it would bring "clarity. to workers on irregular hours and their employers on holiday entitlement" and would be "the simplest approach".

Particular days off

If a holiday entitlement reference period is introduced, the government is also looking at what would happen where an irregular-hours worker takes a particular day off. The government's preferred method would be to calculate a flat average working day during the reference period so that when a worker took a day off, they would simply take off the number of hours calculated from this average working day. The alternative would be to calculate the average hours worked for specific days during the reference period; that is, to work out the amount of holiday a worker would take to have a Monday off work, an employer would calculate the average hours that a worker worked each Monday during the reference period. However, this is expected to be more burdensome for business.

'Agency workers'

The government is also considering how best to calculate holiday entitlement for "agency workers". These proposals look to be intended to apply where an "agency worker" is engaged by either an employment business or an umbrella company, but it's not clear to what type of engagements they would apply. 

The government refers to "agency workers" as those with "contracts for service" but also refers to such arrangements as being operated by employment businesses and umbrella companies. For historic reasons many umbrella companies employ workers on an overarching contract of employment not contracts for services. As a result, it's not clear whether the proposals in relation to "agency workers" are intended to relate only to those workers (umbrella or otherwise) who work under a contract for service or on an assignment basis with no continuity of contract between assignments, or not. Hopefully this will be clarified as result of the consultation; if not, umbrella companies and employment businesses could face more rather than less uncertainty.  

The consultation recognises the complexities employment businesses and umbrella companies face and considers that calculating statutory holiday entitlement at the end of each month (or at the end of each assignment where this is shorter than a month) may lead to an easier and more consistent approach.  

The government also recognises that in terms of workers who work different assignments (which may involve different end clients), it would be complex to include them in the same holiday entitlement reference period. Therefore, it is proposing that, where these workers are not an assignment, they would not accrue holiday entitlement as they are not working. These weeks would not be considered when calculating holiday entitlement for subsequent assignments. This approach would mirror the existing approach taken for the calculation of holiday pay, which is calculated using each individual assignment as the reference period rather than averaging pay over a 52-week period. 

For "agency workers", the government proposes to calculate statutory holiday as 12.07% of hours worked at the end of each month of an assignment (or at the end of an assignment if shorter than a month). This holiday entitlement could either be taken as paid leave during the assignment or paid leave at the end of the assignment; or, alternatively, paid out in lieu of taking leave at the end of the assignment. 

These are just proposals on which the government is seeking responses from the industry, so some of the detail as to how they would work is unclear. For example, a point of clarification for any proposal based on length of assignment would be the question "what is an assignment?": it's not always clear when an assignment begins or ends. For example, would a booking of two hours be an assignment or not? The current proposals refer to assignments of more and less than one month, but there's no detail beyond that.

Rolled-up holiday

The consultation is not intended to change the law on rolled-up holiday pay. Rolled-up holiday pay remains generally interpreted as technically unlawful; however, it has always been the case that the use of rolling-up pay can be understandable provided steps are taken to make clear to all concerned the need to make sure that holiday is taken (not least to avoid health and safety issues associated with over-tiredness) and it is made clear that the rolled-up pay is separate to and additional to normal pay. Where sufficient steps are taken to make clear the rolled-up pay is additional, tribunals will in practice set off sums paid on a rolled-up basis against the amount claims by the worker, often leaving (subject to Harpur Trust v Brazel considerations) no further holiday pay to be paid. 

Some would argue that rolling up using these steps is the best ethical approach for certain types of worker, in that it can help reduce the risk of workers leaving and becoming untraceable without ever using their holiday entitlement – and effectively losing out.

What next?

The consultation does not change the status quo for determining holiday entitlement for part-year and irregular hours workers – the Supreme Court decision in Brazel sets out the current position; the government has published detailed guidance to support employers and engagers in calculating correct holiday entitlement and pay under the current regime. 

However, this consultation indicates a clear direction of travel from the government as it grapples with the complex picture of how existing laws from the UK domestic regime interplay with those which are derived from its former membership of the European Union and increasingly diverse working arrangements.  

The government is clear in the consultation that it wishes to understand how businesses currently deal with these complex holiday pay arrangements and to receive comments on its proposals going forward.

Osborne Clarke comment

It would seem to us that responses on the "agency worker" related proposals which highlight the range and lengths of "assignment" are particularly important to help the government understand how these proposals could work. It will also be important to establish to what types of engagement the proposals relating to "agency workers" are intended to apply. 

Effective new legislation would provide much needed clarity to workers as to how their holiday would be calculated. It would also provide employers/engagers with a clearly defined method to use rather than having to spend time interpreting complex case law. 

We are helping suppliers and users of relevant workers take steps to minimise relevant risks by reframing how relevant workers are engaged.