Unless you are new to HR, you’ve spent the last few years watching the progress of this case through the courts. The journey has now concluded with the Supreme Court’s judgement being issued over the summer. Now we are having to get to grips with the practical implementation of the ruling because it’s not just about teachers in schools.

The key issues:

• All workers, employees being a subset of worker, are entitled to 5.6 weeks of annual leave
• There is no provision in law to pro-rate this leave for those workers who only work part year
• Workers must be paid their normal earnings for all periods of annual leave

Entitlement to 5.6 weeks of Annual Leave

Any worker who is engaged under any form of contract for the full leave year is entitled to receive 5.6 weeks of paid annual leave. This includes casual workers who are issued with a ‘letter of engagement’ even where this states that there is no contract of employment in place between assignments. The Supreme Court acknowledged, as did previous courts, that this would give rise to a significant advantage to some employees e.g., an exam invigilator, but that this was not a good reason for failing to follow the law.

No provision to pro-rate for part year work

The wording of the Working Time Regulations 1998 as amended provides that ‘a worker is entitled to four weeks’ annual leave in each leave year’ (S13) and ‘a worker is entitled in each leave year to a period of additional leave … in any leave year beginning on or after 1st April 2009, 1.6 weeks.’ Unlike the regulations preventing less favourable treatment for part time workers, which provide for pro-rating for less than full time hours, the Working Time Regulations have no such provision. The Supreme Court ruled therefore that there was no grounds in law, to pro-rate annual leave entitlement for part year working. So, no matter how many weeks a worker actually undertakes work in, if the person is engaged for the complete annual leave year, they are entitled to the full 5.6 weeks of leave.

This means that the traditional 12.07% calculation that has been used to compensate atypical workers is no longer fit for purpose. This percentage is derived from determining the ratio between leave entitlement and weeks of work i.e 5.6 / 46.4 (number of weeks of work) x 100. On the basis that you can’t pro-rate leave entitlement for part year working this means that the ratio needs to be calculated on an individual basis. For example:

Term time only working

• if contracted to work 39 weeks the ratio is 5.6/39 x 100 = 14.36%
• if contracted to work 40 weeks the ratio is 5.6/40 x 100 = 14%

This poses some practical problems in that most payroll systems aren’t able to cope with individual percentages being applied for leave entitlements. In addition, the Working Time Regulations are clear that a person should not be dissuaded from taking their leave for financial reasons. By paying an individual percentage-based premium the person is not being paid for the leave at the time they take it which may have the effect of dissuading them from taking their leave. We have known for some time, that rolled up holiday pay is technically unlawful but have continued to be able to use this approach provided base pay and annual leave pay are clearly and separately defined in the contract of employment and on the payslip.

Instead of using a percentage calculation, employers are advised to work on the basis that a worker accrues 0.11 week of annual leave for each week (0.47 weeks of annual leave per calendar month) that they are engaged and either allow them to draw down on accrued leave as and when or specify when the employee is to take that leave. You can specify that the leave accrued must be taken on the last working day of the month, or 1.4 weeks at the end of each quarter. The only stipulation is that you must give at least twice as much notice as the length of the leave.

Annual leave entitlement can only be pro-rated for part year working when the worker is not engaged for the full leave year.

Example 1:

A teacher is engaged for one term. They would not be entitled to 5.6 weeks of leave because they are not engaged for the full leave year. The teacher will accrue annual leave at the rate of 0.93 weeks of leave per half term (or 1.87 weeks per term). As teachers cannot take leave during term time, the employer can opt to pay a period of holiday for each school closure period i.e., 0.93 weeks of pay at half term and at the end of term, pay the whole entitlement of 1.87 weeks leave as a lump sum on termination, or extend the employment period to allow the teacher to take the full 1.87 weeks leave at the end of the complete term.

Example 2:

A person is hired for 6 months to cover sickness absence. They would be entitled to 2.8 weeks of annual leave for the duration of the contract. The employer can choose to allow the employee to book and take leave during the 6-month contract, paying for any untaken leave on termination, stipulate when the leave is to be taken or say that leave cannot be taken during the contract and the 2.8 weeks will be paid as a lump sum on termination.

Calculating Holiday Pay

For those who don’t work regular hours each week, S224 of the Employment Rights Act 1996 sets out how to calculate holiday pay. As amended, on the first day of leave, the employer must find the average weekly remuneration in the 52 weeks immediately preceding the leave. Subsection 3 provides that ‘no account shall be taken of a week in which no remuneration was payable by the employer’ and that employers need to continue to look back to find 52 weeks in which remuneration was paid up to a maximum of 104 weeks.  For example, a worker works every other week and hours per week vary. To calculate holiday pay, the employer would need to add up the pay received for the 52 weeks that the employee worked and would have to go back 104 weeks to achieve that.

If the employer has counted back 104 weeks and still does not have 52 weeks, the average must be calculated over the number of weeks in which the worker received pay. If the worker has not been engaged long enough for the employer to calculate the average over 52 weeks, the average must be calculated over the number of weeks the worker actually received pay.

What does this mean ?

Currently any worker who has worked for part of a year who has received holiday and holiday pay based on the 12.07% calculation method will need to have their entitlement adjusted and a payment made for the difference. Under current rules they would be able to claim two years of back pay for unlawful deduction to wages.

Take action:

• Identify all atypical workers – casuals, annualised hours, seasonal workers, term time only.
• Determine which are engaged over the full leave year and identify any that don’t need to be.
• Decide which approach to paying 5.6 weeks of annual leave will be used for each group – you don’t have to use the same method for all groups of workers:
  • • For term time only, you can calculate the correct percentage up front using 5.6 / number of weeks expected to work,
    • For casuals, you can continue to pay 12.07%, provided this is clearly separated in the statement of particulars and on the pay slip, and at the end of the year pay the difference between what they have received and what they are entitled to,
    • For annualised hours, you can stipulate a period of leave for each worker and pay their holiday pay for that time off,
    • Allow the employee to accrue 0.11 week of annual leave for each week they are engaged and allow them to draw down on that to actually take their leave
    • Pay them 0.47 weeks’ worth of leave each month for each month they are engaged by you.
• Start calculating the cost of back pay, currently limited to 2 years for unlawful deduction to wages claims.

If you would like advice on a specific case, please contact us on advice@seemp.co.uk

Government consultation

The government has launched a consultation on holiday entitlement and pay following on from the Supreme Court ruling. See the ‘Calculating holiday entitlement for part-year and irregular hours workers consultation’ documents here. The consultation closes 9 March 2023.