Last year’s Supreme Court ruling in Harpur v Brazel highlighted the flaws in the current system for working out holiday entitlement and pay. The case (which we wrote about here) concerned a teacher on a permanent zero-hours term-time contract, but impacted a much wider group of workers including many casual workers. The Supreme Court ruled that all workers are entitled to 5.6 weeks’ holiday each year, which could not be pro-rated downwards to reflect hours actually worked. The ruling also confirmed that holiday pay must be based on the statutory formula (using average pay over the last 52 paid weeks) and not a 12.07% uplift on earnings.

The outcome in Harpur v Brazel means that employees who work part of the year (e.g. on term-time contracts) are entitled to a larger paid annual holiday entitlement than part-time workers who work the same number of hours each week across the year. The ruling also rejected the common practice of using the 12.07% method for calculating holiday entitlement or holiday pay for casual workers. This has left many employers unclear about how to design a compliant holiday system for casual workers.

Many of those impacted by the judgment are working in the education sector, which is presumably adding to the pressure on the government to address the consequences. The government is now consulting on legislating for a new approach that aims to ensure that holiday entitlement stays in proportion to hours actually worked. The planned approach seems sensible and measured, although perhaps may have been designed with workers in the education sector in mind and may be less suitable for other casual workers. Interestingly, the consultation makes no reference to holiday pay, focussing, instead, on just holiday entitlement.

The new proposed system

The government’s plan is to introduce a new system for calculating holiday entitlement for part-year and irregular hours workers. The idea is that holiday entitlement for these kinds of workers will be calculated as follows:

• Employers would calculate an individual’s holiday entitlement at the start of each holiday year by looking back at the hours they worked in the last complete holiday year.

• Employers would multiply last year’s hours by 12.07% to get next year’s holiday entitlement.

• New starters would accrue holiday entitlement on the basis of 12.07% of hours worked in the previous month until they had built up a sufficient record to look back on as a reference period.

• If an individual works irregular hours and wants a day off as holiday, employers would work out how many hours of their holiday entitlement this would use up by reference to an average working day.

• Agency workers would accrue holiday entitlement on the basis of 12.07% of hours worked at the end of each month of an assignment, or at the end of an assignment if shorter than a month.

• The new system would apply only to individuals working part of the year or irregular hours.

• The new system would be only for calculating holiday entitlement. The system for calculating holiday pay would remain unchanged. Holiday pay would, therefore, be based on a different reference period (the last 52 paid weeks, on a rolling basis, rather than all weeks over the last holiday year) and would still be calculated in weeks without any system for translating this into days or hours.

Our views and next steps

The consultation will be welcomed by many employers as a positive attempt to find a solution to the outcome in Harpur v Brazel. It is clearly sensible that holiday entitlement should reflect hours worked. The simple 5.6 weeks’ holiday allowance for everyone, as currently set out in the Working Time Regulations, is arguably no longer workable because it cannot easily be translated into hours or days for workers whose hours vary and it includes no principles for pro-rating.

It is also helpful to have legislative endorsement of the 12.07% method, which has never been referenced in the Working Time Regulations but has long been used by employers principally to calculate holiday pay but sometimes also to calculate holiday entitlement (as proposed in the new consultation). For a period of time, it was also the method suggested by Acas. As a reminder, 12.07% is the statutory minimum holiday entitlement in a year (5.6 weeks) expressed as a percentage of the number of working weeks in a year (46.4 weeks). (This calculation comes out as 12.0689 but is generally rounded to 12.07).

There are certainly benefits to a lookback system which delivers certainty about each year’s holiday pot at the beginning of the holiday year for employees who do not know the total hours they will be working that year. This plan may be particularly suitable for stable populations of workers who tend to stay with their employer for years and whose hours do not vary much from year to year.

The government’s plans do, however, have some drawbacks and do not necessarily deliver the best answers in other situations. For example:

• Some employees working part of the year or irregular hours will already know the total number of hours they will be working for each holiday year, even if their working pattern is less predictable. Their holiday allowance could be calculated more simply by pro-rating 5.6 weeks downwards to reflect their agreed hours commitment for the coming holiday year, rather than having to look back on an earlier holiday year, as is being proposed.

• For worker populations who are transient, or whose hours vary significantly from one year to the next, it may be better to have a simple accrue-as-you-go system, where individuals build up holiday entitlement for each year at 12.07% of every hour worked that year.

• Many casual workers are not obliged to work any particular hours or days. For those individuals, the better solution might simply be for employers to make a rolled-up holiday payment (e.g. based on 12.07% of earnings) rather than having to earmark any particular hours as holidays. This is currently unlawful but the government could choose to legislate to permit it.

In our view, therefore, the consultation is a positive step forward but the government could go even further if it moved away from the “one size fits all” approach. An even better answer might be that the government essentially signs off a variety of lawful options and employers could then choose which of those options works for their business and their working population.

Looking ahead, we think it is unlikely that this consultation will be the last word on reforming the increasingly outdated Working Time Regulations. The Retained EU Law (Revocation and Reform) Bill, which is currently working its way through parliament, provides that the Working Time Regulations will be revoked on 31 December 2023 unless deliberately saved or replaced beforehand (see our article on the Bill for the details). Assuming the Bill continues to progress, we can expect further consultation in the coming months on how the Working Time Regulations should be dealt with. Further consultations might even explore wider reforms, such as defining working time.

Lewis Silkin will be responding to the current consultation on holiday entitlement for part-year and irregular hours workers so please get in touch if you want to share your views. You can download the full consultation here.