The Brazel Judgment - One Month Later
One month on from the landmark Supreme Court judgment, Simon Bevan examines some of the key implications of the case for employers.
What Is the Impact of the Judgment?
The judgment confirms how holiday pay must be calculated for permanently retained part-year and irregular hours workers. These staff must receive a minimum of 5.6 calendar weeks' statutory annual leave. Under the Working Time Regulations 1998 (WTR), this must be paid at the rate of a week's pay for a week's leave and the entitlement cannot be reduced on a pro-rata basis to account for the reduced proportion of the year, that the worker actually spends at work.
It is important to understand what this means in practice. This can be particularly challenging in respect of workers who work on both a part-time and part-year basis. To use a worked example, a part-year worker who works 39 weeks (75%) of the year is still entitled to a minimum of 5.6 weeks' paid annual leave. It would be unlawful to reduce this entitlement to 4.2 weeks (75% of 5.6 weeks). If that worker also works part-time at 25 hours per week across their 39 weeks per year, they will be entitled to 25 paid hours off per week of annual leave.
In light of the judgment, employers who have historically reduced part-year workers' holiday entitlement on a pro-rata basis, or who have used the 12.07% (or similar) percentage method to calculate holiday pay, may have been underpaying holiday.
Key Takeaways for Employers
The potential ramifications of the judgment are significant. The position will be different for different employers, depending on the categories of affected staff, existing contractual wording and established holiday pay calculation practice. You first need to establish whether there has been an underpayment, before then deciding on your approach to holiday leave and pay going forward. Working through the questions below will help you assess your organisation's position so that you can decide on your next steps.
What Do Your Contracts Say for Each Category of Potentially Affected Staff?
Your starting point should be to check your existing contracts. If they provide for a reduced holiday entitlement equating to less than 5.6 weeks, there is likely to have been an underpayment. Even if they provide for at least statutory holiday entitlement, you will need to determine whether what was happening in practice aligns with the contractual wording.
How Do You Currently Calculate Holiday Entitlement and Holiday Pay?
Next, is to establish how holiday is currently calculated and paid. This may require you to look at payroll data and pay records. You may be able to identify a formula that has been used to calculate holiday, or there may be reference to a percentage multiplier, for example.
How Will You Calculate and Pay Holiday Going Forward?
Going forward, you will need to calculate holiday pay based on the requirements of the WTR. This will require you to calculate the amount of a week's pay, and multiply this by 5.6 to calculate annual holiday pay entitlement. You will need to consider each category of staff separately, as your calculations will be different depending on whether staff have normal working hours or no normal working hours, as well as whether their pay varies:
- for staff with normal working hours and pay that does not vary, the amount of a week's pay is the amount payable under the contract of employment if the employee works their normal hours in a week
- for all other staff with variable pay and/or with no normal working hours, you will need to calculate their average pay over the last 52 worked weeks. There is a prescribed method for carrying out this calculation, which requires unworked weeks to be substituted with worked weeks going back a maximum of 104 weeks. (This approach avoids a worker's average weekly pay calculation being reduced in weeks when they were not working).
Has There Been an Underpayment?
We anticipate that most employers may identify that holiday pay has not been calculated in the correct way, for all staff. However, this does not necessarily mean there has been an underpayment. For example, if you used a percentage method to calculate holiday pay, but used a percentage higher than 12.07%, you may find you have paid the statutorily required amount of holiday pay, albeit it wasn't calculated in the correct way. Otherwise, if you provide for contractual holiday in excess of the statutory minimum, again you might find that you have paid the right amount of statutory holiday, even though the methodology was incorrect.
To establish whether there has been an underpayment, you will need to calculate the amount of holiday pay that should have been paid, as well as the amount that was actually paid. It is important to be certain of the value of any potential underpayment, before you decide on your next steps. Please note that the actual holiday payment made, is offset against the potentially larger amount which should have been paid. It is only the difference between the two amounts, which may be outstanding and due as backpay.
Confirm Your Next Steps
If you have not been calculating holiday pay according to the WTR method set out above, you will need to correct your holiday pay calculations going forward. If there has been an underpayment, your holiday pay bill will now increase. You may wish to explore whether and how you mitigate the impact of the judgment going forward, for example in how you contract with staff (including the extent to which you control when and how holiday is taken), or whether you can recoup the additional cost of a higher holiday pay bill from elsewhere within the business.
You will also need to decide on your approach to back pay. Depending on the timing of the payments you have made, you could be liable for up to two years' rolling back pay per affected worker. You will also need to consider your approach to staff contracts (both for existing and new staff), and plan staff communications accordingly. You may find it helpful to take advice on your individual position so that liability can be properly assessed and staff relations can be appropriately managed.