Holiday pay – the end of the 12.07% “rule”?

The wheels of justice sometimes turn very slowly – the Supreme Court has recently issued a final decision in the case of Brazel v Harpur Trust, the initial employment tribunal claim having been raised as long ago as 2016.  We reported on the Employment Appeal Tribunal’s (“EAT”) decision in 2018 [Holiday pay for casual workers – Help?!]

Background and arguments

This long-running litigation considers the holiday pay entitlement of a worker (in this case a music teacher) who provided services during term time but not during school holidays, however, she was “engaged” as a worker throughout the year.  It was accepted that in line with the Working Time Regulations (“WTR”) she was entitled to 5.6 weeks’ leave each year (which had to be taken during the school holidays), but there was a dispute as to her entitlement to pay for these holiday weeks.

The employer argued that it was entitled to carry out a percentage based calculation, which was supported by what was then ACAS guidance.  For every hour worked by Mrs Brazel, the employer calculated 12.07% of salary and put that in a “pot” for her to be paid when she took her holiday entitlement at the end of that term.

Mrs Brazel argued that this approach was wrong – nowhere in the WTR or in the European Working Time Directive was there any support for this calculation.   Rather, the WTR say that every worker is due 5.6 weeks’ holiday a year, and for each week’s holiday, the worker is entitled to a week’s pay.  The rules at that time stated that in order to calculate a week’s pay, you must look at the average pay in the last 12 weeks in which work was carried out, with the result that a “normal” week’s pay would be due for each week’s holiday.

The result of this argument would be that the term time worker would receive 5.6 weeks’ “normal pay” each year despite only working 32 weeks.   By contrast, other workers and employees who worked year round would need to work 46.4 weeks to get 5.6 weeks’ paid holiday.   Mrs Brazel’s entitlement to receive pay for annual leave would seem therefore, if she was correct, to be disproportionately high compared to these other workers.  

Decision

Nevertheless, the EAT agreed with Mrs Brazel that her employer had calculated her holiday pay incorrectly and therefore underpaid her.   There was no justification for the 12.07% calculation.  This decision was upheld by the Court of Appeal, and now the Supreme Court has also found in favour of the worker.   When working out holiday pay for workers who only work during term time, it is wrong to apply the 12.07% “rule” or to carry out any pro rata calculation to reflect the fact that they do not work the full year.   While this does mean that term time workers have a proportionally greater entitlement to paid annual leave, the Supreme Court held this is not an “absurd” result.   The position is therefore quite simple – each week of annual leave (5.6 per year) should be paid at the rate of a week’s pay, worked out in line with the statutory rules.

Implications

It is worth noting that since Mrs Brazel raised her claim, the statutory rules under the WTR have changed – the “reference period” for calculating holiday pay has changed from 12 weeks to 52 weeks (from April 2020).   Crucially, however, it is still necessary to ignore any weeks where no work was done – in this case, to ignore the school holidays and simply look at the last 52 working weeks.   This would therefore produce a similar result to the 12 weeks rule and each week of holiday would receive payment of a “normal” week’s pay.

ACAS no longer recommends the 12.07% rule.  Detailed guidance on holiday pay calculations can now be found on the government website.   Calculating holiday pay for workers without fixed hours or pay – GOV.UK (www.gov.uk)

Does this decision have wider implications than merely for term time workers? 

Many employers do use the 12.07% rule for a range of staff, “casual” workers or others whose hours vary from week to week.   Sadly, there is no legal basis for doing so.   In practice, if staff do work every week (other than annual leave), the 12.07% calculation will in many cases give an answer that is not too far off, but to be absolutely correct, holiday pay should be calculated in line with the rules:  when a week’s holiday is taken, work out a week’s pay by looking at average remuneration (including overtime and other regular allowances) over the last 52 weeks in which work was done, but not going back any more than 104 weeks, ignoring weeks where no work was done.  It is cumbersome and administratively demanding, but doing it right should avoid potentially costly and long running claims.

This update contains general information only and does not constitute legal or other professional advice.

Douglas Strang, Senior Associate: dst@bto.co.uk / 0141 221 8012

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