This is a significant judgment for any employers of part-year (including term-time-only) and irregular hours workers who are retained on a year-round basis. The decision confirms these staff must receive a minimum of 5.6 weeks' statutory annual leave, regardless of the amount of time they actually spend working across the year. There is no mechanism within the Working Time Regulations (regulations) to reduce holiday pay in proportion to part-year working. This means that the holiday pay of part-year and irregular hours workers will proportionately exceed that of their year-round counterparts.
Mrs Brazel is a visiting music teacher employed under a zero hours term-time-only contract. She works variable hours according to the fluctuating demand for music lessons.
Mrs Brazel’s holiday pay was calculated with reference to the sector-standard 12.07% formula. This formula represents the statutory holiday to which year-round staff are entitled (5.6 weeks equates to 12.07% working time). Until recently, this method was promoted by ACAS, endorsed by the Government and widely accepted as the correct way to calculate term-time only staff holiday entitlement.
Mrs Brazel’s claim was that this method bears no reference to the regulations, which for her category of worker simply requires holiday pay to be calculated based on average weekly pay, without including any reduction to reflect part-year working.
The Supreme Court considered the wording of the regulations, both in the context of retained European law principles, and the framework of domestic legislation. The Supreme Court considered the Working Time Directive, which is retained law post-Brexit, and which sets out EU minimum annual leave rights. The Supreme Court accepted that retained EU case law generally allows for a worker's minimum holiday entitlement to be calculated on a pro-rata basis. However, the Directive also does not prevent individual countries from allowing a more generous holiday entitlement under domestic law.
The Supreme Court then turned to our domestic holiday rights framework, which is set out in the regulations. The regulations require all workers and employees who are engaged throughout a year to benefit from 5.6 weeks holiday in each year.
The pay for this holiday is to be calculated with reference to a normal week's pay. Legislation prescribes how this should be calculated. For those who work standard hours it is based on their normal weekly pay. For staff who work variable hours this is based on an average, taking into account the last 52 paid weeks, with weeks where nothing is earnt being ignored.
The Supreme Court recognised that the practical effect of this is that the regulations are more generous than EU law, but the Supreme Court held this does not mean the regulations are incorrect.
The impact of the decision also extends far beyond the education sector. It will affect all employers of part-year and irregular hours workers, who are retained on a year-round basis but who spend part of the year not working. Employers of part-year and irregular hours workers will now need to review the way they remunerate staff holiday. This will increase the cost pressures on those sectors who widely use variable hour staff to meet flexibilities in the demand for work.
As an employer, you need to understand the potential financial impact of the judgment on your organisation.
You will need to identify which categories of staff are likely to be affected and assess whether there is any shortfall.
You will need to calculate the difference between holiday pay staff have received, and what they should have been paid had their holiday not been pro-rated in proportion to their part-year working. The specific calculations you carry out may change for each category of affected staff, but broadly speaking, you should be calculating a week's pay, and then multiplying that figure by 5.6 to calculate individual annual holiday pay entitlements.
If there has been a historic underpayment, it may be necessary to pay up to two years' holiday back pay to affected staff (although it may be lower than this in some circumstances).
Once you understand the potential financial exposure, you will need to take a strategic decision on the extent to which you will communicate with staff on the decision, and your approach to back pay generally. You may need to take individual advice on the best way to manage this in your organisation's individual circumstances.
You will also need to consider your approach to holiday pay going forward. An assessment will be needed as to whether you need to change contractual arrangements and holiday pay going forward.
This may also lead to wider strategic considerations about your use of bank staff, if applicable, and general contractual arrangements for part-year workers. If staff are only needed for short spells in each year, a permanent contract of employment may not be the best way to engage with individuals. Again, your approach may be different for different categories of staff and you may need to take individual advice in order to understand the specific options for your organisation.