Posted: 07/03/2023
The Working Time Regulations 1998 are not clear as to how entitlement to paid holiday is calculated for casual workers. The regulations simply state that all workers are entitled to 5.6 weeks’ holiday per leave year. The 5.6 weeks’ leave entitlement is not ‘pro-rated’ down for those not working regular hours or days. Holiday pay is calculated on the average of the last 52 weeks’ pay, excluding periods in which no pay has been received.
The regulations appear to assume that, because a week’s pay will be lower for anyone working anything other than a regular full week, they will get paid correctly if they take holiday.
For example, someone working a regular three-day week (where the normal working week is a five-day week) will be paid their normal weekly pay if they take a week’s holiday. A week’s holiday in this example would constitute three working days and two non-working days. Their leave entitlement for the rest of the year would be reduced to 4.6 weeks after they take a week’s holiday.
However, employers generally allow workers to take leave in periods of days or half days, rather than a whole week. As such, by necessity, employers must work out leave entitlement in days, rather than whole weeks.
For those working regular hours, again this is easy to do. Using the above example, a worker working a three-day week with the same number of hours each day would use up a third of a week’s leave and be entitled to a third of a week’s pay for each working day taken as holiday. The employer knows, in advance, that the annual holiday entitlement, expressed in days, is:
28 days x 60% (3/5 of a normal working week) = 16.8 (normally rounded up to 17 days).
However, this is much more difficult for those working irregular hours or part of the year and, as stated above, the Working Time Regulations are not clear how this should be calculated.
Government guidance acknowledges that the regulations do not set out how to convert a weekly entitlement into days or hours for those working irregular hours. It suggests that ‘in practice, if needed, employers may wish to calculate average days or hours worked each week based on a representative reference period, although the Regulations do not expressly provide for this.’ This method also seems to be at odds with the current law (see below).
Many employers that use a substantial amount of casual labour have permitted casual workers to accrue holiday at a specified notional rate each month.
The figure of 12.07% is generally used as this represents holiday expressed as a percentage of working time:
52 weeks less 5.6 weeks’ holiday leaves 46.4 working weeks in the year. 5.6 is 12.07% of 46.4.
Using this method, holiday entitlement equates to just over seven minutes for each hour worked. For example, if you had worked 10 hours, you would be entitled to 72.6 minutes paid holiday:
12.07 x 10 hours – 1.21 hours or 72.6 minutes.
This approach for accrual accords with earlier government guidance, which has since been deleted, and replaced with the passage quoted above. It was also set out in ACAS guidance (also no longer in force).
Under this method, holiday pay could be ‘banked’ and paid out when holiday was taken. More commonly it has been paid out every month as rolled-up holiday pay (see below).
Although the 12.07% formula set out above has become the generally accepted method for calculating holiday pay, it does not appear in and is not prescribed by the Working Time Regulations. It is also not guaranteed to comply with these regulations – for example, where working hours differ greatly from one part of the year to another.
This is because the 12.07% method calculates holiday entitlement as a percentage of hours worked. By contrast, the regulations calculate holiday entitlement according to the number of weeks in the holiday year that the individual has been engaged, regardless of the amount of work done.
This becomes most problematic where there are weeks during which the worker remains under contract but does no work. The longer the period without work, the more inaccurate this method becomes. This is because, for every week the worker remains under contract, they accrue 5.6/52 or 0.11% of a week’s leave pursuant to the regulations, even if no work is done. However, under the 12.07% rule they would accrue no leave if no work had been done.
This issue came to light in the case of Harpur Trust v Brazel, which eventually reached the Supreme Court.
As a result of the Supreme Court’s judgment in this case, the government guidance and ACAS guidance referred to above were updated. The 12.07% method cannot be considered as necessarily complying with the Working Time Regulations.
So, as the law stands, workers accrue holiday at the annual rate of 0.11% of a week’s leave for every week they are under contract. However, other than in the first year of employment, the full leave entitlement crystallises at the start of the leave year ie it does not accrue on a pro rata basis.
This means that where workers are under contract for a full leave year, but are only actually required to work for part of that year, they will accrue, and be able to take, a full year’s work of leave at the start of that year, regardless of how much work they actually do for the remainder of the year.
As a result of the Brazel decision, the government has launched a consultation on the calculation of holiday pay for part year and irregular hours workers. The consultation document notes that because of this judgment part-year workers are now entitled to a greater holiday entitlement than part-time workers who work the same total number of hours across the year, and the government is keen to address this disparity.
The consultation commenced in January 2023 and closes on 9 March 2023. There is currently no proposed timescale for any changes to come into effect.
The practice of paying rolled up holiday pay every month was found to be contrary to the Working Time Directive (the EU legislation on which the Working Time Regulations are based) in the case of Robinson-Steele v RD Retail Services Limited [2006].
In this case, the European Court of Justice (ECJ) said that paying holiday pay in this way could deter workers from taking their holiday. The purpose of the Working Time Directive was to enable and encourage workers to get appropriate rest breaks and holiday leave.
However, the ECJ also stated that sums already paid under a ‘transparent and comprehensible’ rolled-up arrangement could be offset against a claim for unpaid holiday pay, thereby reducing the financial risk for employers who carry on the practice.
As such many employers continue to use this system. This law is still applicable in the UK. The risks of rolled-up holiday pay have now increased, since calculating holiday pay as 12.07% of working pay may well result in an underpayment, particularly where the worker does not have normal working hours and where there are some weeks with no work and no pay.
The government proposes introducing a 52-week holiday entitlement reference period for part-year workers and workers with irregular hours, based on the proportion of time spent working over the previous 52-week period, including weeks in which no work was done. Holiday entitlement would be calculated in hours at the start of the leave year, as 12.07% of the hours worked in the previous 52 weeks. An accrual system would apply in the first year of employment, whereby at the end of each month the worker accrues leave equivalent to 12.07% of the hours worked in that month.
For agency workers, the government acknowledged that a 52-week reference period is impractical given the nature of agency work. Therefore, it proposes that agency workers accrue leave each month at 12.07% of hours worked in that month. No leave will accrue in between assignments. Leave could be taken during an assignment or, for shorter assignments, could be taken (or paid in lieu) at the end.
The consultation paper also includes a proposal for how to deal with the length of a day's holiday where the worker has irregular hours. It proposes that a day's holiday should be based on a ‘flat average day’, calculated as the average length of a working day for that worker over the 52-week reference period used to calculate annual leave entitlement.
Rolled-up holiday pay and banking holiday
If currently using rolled-up holiday pay, the best way to ensure that there is a transparent and comprehensible system, which is compliant with the current law, would be to clearly identify on the payslip and on any other relevant documents a separate payment of rolled-up holiday pay, and to ensure that employees are aware that they are receiving a sum in respect of rolled-up holiday pay, as well as their basic salary.
Alternatively, it may be preferable to have a system whereby employees do not get paid their holiday pay each month, but rather that sum is ‘banked’, and they then get paid the holiday pay when they take the leave. Assuming they are paid the correct amount (and an adjustment may have to be made on the amount they have ‘banked’), and allowed to take 5.6 weeks per year, this should be fully compliant with the Working Time Regulations and current law following Harpur v Brazel.
Accrual of holiday
Employees under contract for a full year would get 5.6 weeks of holiday paid under the method prescribed in the Working Time Regulations. They would book the holiday as set out in the contract and be paid for it when they take it.
It is possible that, under this method, workers might accrue leave even though they are not working very much eg zero hours employees who remain ‘under contract’. However, in such cases, there are several methods to avoid over-accrual and over-paying – which method may be appropriate will depend on the circumstances of the case:
Claims for holiday pay
In the Brazel case, it was found that the 12.07% pay calculation was incorrect, and the employee’s holiday pay worked out as 17.5% of her pay for work done. She had therefore been underpaid for her holidays.
Workers can bring claims under the deductions from wages provisions in the Employment Rights Act in respect of unpaid or underpaid holiday pay. The time limit for bringing claims is three months from the last deduction, or last in a series of deductions, but claims can only go back two years.
Change now, or await new legislation?
It is likely that legislation will be introduced to deal with the current uncertainty. If this is along the lines of the government proposals as set out in the consultation document, then using a method referencing 12.07% may well be appropriate going forward after the legislation comes into force.
However, such legislation might not come into force for some time and is unlikely to be retrospective, and so claims for unpaid holiday pay may still be possible for some time into the future.
Changing methods of accrual/payment now may end the series of deductions and crystallise the three-month time limit. Claims brought after that time limit are likely to be time-barred.
However, changing now might alert potential claimants who could otherwise have been unaware of the issue, or, start a hare running when the accrual/payment has not been wildly inaccurate. It should also be remembered that, where employees do not request or take annual leave – which is often the case with casual workers – no right to paid leave arises until the contract is terminated. As such, there may be no historic liability to pay for annual leave in many cases. Employers should however ensure that workers are aware of their right to book and take holiday and that they have not been deterred from doing so.
Changing contractual terms will require consultation/agreement with workers, and potentially involve a formal process of consultation with employee representatives, if 20 or more employees are involved. Depending on contractual terms and the approach you adopt, there may be no need to amend the wording of the contract, but simply to adjust the underlying calculation method.
These considerations will be finely balanced and will differ according to the circumstances.
The information contained in this guide is general in nature and is not intended to constitute legal advice. It has been prepared to reflect the law as of March 2023.
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