Holidays – Supreme Court rejects popular ‘percentage method’ in key decision

Holiday entitlement for workers without normal working hours must be calculated strictly in accordance with the Working Time Regulations 1998, even if this means full-time salaried workers are worse off by comparison.

Under the Working Time Regulations (“WTRs”), a worker is entitled to a minimum of 5.6 weeks of paid holiday a year (inclusive of bank holidays). For full-time and part-time workers with normal working hours, the calculation of holiday entitlement has (to an extent!) been clarified in recent years in a series of court decisions. However, calculating holiday entitlement for atypical workers, including those without normal working hours, has remained more of a vexed question.

For those on zero hours contracts, a popular solution among employers is to say that entitlement accrues at a rate of 12.07% of the hours actually worked, on the basis that 5.6 weeks of holiday is 12.07% of a standard working year of 46.4 weeks (being 52 weeks less the 5.6 weeks of holiday). Holiday pay is then calculated based on the worker’s hourly rate.

While this approach, known as the ‘percentage method’, is based on the logical view that holiday ought to accrue in line with work done, it has been subject to criticism on the basis that it does not strictly follow the rules applicable to workers without normal working hours as set out in the WTRs. A recent case in the Supreme Court has now confirmed that ‘the percentage method’ must not be followed.

The case concerned Mrs Brazel, who was a visiting teacher employed on a zero-hour basis at a school run by the Harpur Trust. While Mrs Brazel worked under a permanent contract, she was only paid for the work she actually performed. She did not work a full working week and did no work at all for large parts of the year. After the Trust calculated her holiday pay using the 12.07% ‘percentage method’, Mrs Brazel brought a claim for unlawful deduction of wages, on the basis that her holiday pay would have been around 17.5% of her earnings had it been calculated in line with the WTRs.

After being heard by the Employment Tribunal, the Employment Appeal Tribunal and the Court of Appeal, the case eventually landed in the Supreme Court. The Supreme Court unanimously held that the use of the ‘percentage method’ was wrong and had resulted in an underpayment. The correct approach, which it described as the ‘calendar week method’, was to calculate a week’s pay by working out the total hours worked and pay received over the whole of the relevant reference period (this is now 52 weeks, but at the time in question was 12 weeks), then dividing by the number of weeks in the reference period. A week’s pay is then due for each week of holiday taken. The amount of holiday pay can therefore vary from one holiday to the next, depending on how much work has been done and pay received in the preceding reference period.

The Court acknowledged that this method of calculation could and often would result in workers without normal working hours receiving a greater amount of holiday pay (pro rata) than full-time salaried workers but rejected the argument that this produced an absurd result, noting that it did not infringe any EU or domestic law. The Court was clear that the holiday entitlement of part-year workers such as Mrs Brazel was not required to be and must not be reduced in order to keep it in proportion to that of a full-time worker.

This decision is of great importance to any employers with workers who do not have normal working hours. Subject to the nature of the contracts which are in place and how workers are paid, this is likely to (but will not necessarily) include term-time only or other part-year workers.?We recommend that all employers who engage such workers review their approach to the calculation of holiday entitlement and pay in the wake of this judgment. This is a highly technical area, and we would be happy to advise you on your specific circumstances.

If you have any questions in relation to this article or indeed any other employment law related enquiries, please email: [email protected] and we would be happy to assist.

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