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Holiday pay for part-year workers

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The recent decision from the Supreme Court in July 2022 brings to an end the long-standing Harpur Trust v Brazel dispute and provides welcome certainty to employers surrounding the method by which payments of holiday pay are made to non-regular workers.

Non-regular workers impacted by the judgement are those workers or employees on permanent contracts who work irregular hours and are paid on an hourly or daily basis, including individuals engaged under zero-hours contracts. The decision does not impact full-time workers, part time workers with regular hours or workers with a fixed salary.

Worker is a classification of employment status under UK employment law, where an individual has entered into or works under a contact of employment, typically with no regular or guaranteed hours, and can include individuals engaged as contractors.

What is the impact of the judgement?

Many organisations adopted the ’12.07% method’ of calculating holiday pay in line with guidance issued by ACAS, which has since been withdrawn. The Supreme Court’s judgement has confirmed that this method should no longer be applied by employers when calculating the value of holiday pay for non-regular workers.

Holiday pay for permanent workers with irregular hours should be calculated with reference to work undertaken across a 52-week period, which is then multiplied by the 5.6 weeks annual leave entitlement. This change can produce some unusual results (e.g. a worker who is usually entitled to one week’s pay being given 5.6 weeks holiday entitlement), however in their judgement the Supreme Court noted that any slight favouring of such workers was not of a magnitude that would require wholesale revision of the general rules.

Now the position in respect to holiday pay calculations is clear, organisations should consider the wider implications of this decision. The decision has been widely publicised, and there is currently a high level of activity with unions (UNISON was an intervener on the case). It may be that organisations will receive communication from trade unions or staff directly, requesting back pay.

What should organisations do now?

  • Review current holiday pay arrangements and calculations to ensure these are in line with the new approach.
  • Quantify the potential back-pay liability. Where an underpayment has arisen, there is a risk of a potential claim from an employee. Most claims going to employment tribunal can be backdated for a period of 2 years from the date of the most recent deduction from pay.

Where the underpayment is considered material to the financial statements, judgement will be required over whether there is a legal or indeed a constructive obligation leading to recognition of a provision or a contingent liability in the financial statements.

  • Employment status is frequently challenged, and therefore employers should also assess the risk of any of their contractors being found to be workers or employees as this could lead to additional liabilities.
  • Organisations might also consider the basis on which they continue to employ irregular workers. A review might consider whether the mix of fixed-term contracts, consultants and permanent staff on variable contract hours is still appropriate

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Naziar Hashemi
Naziar Hashemi
Head of Social Purpose and Non Profits