On 20 July 2022, the Supreme Court delivered the anticipated judgment in Harpur Trust v Brazel, rejecting the Trust’s appeal and upholding the decision of the Court of Appeal. The decision has major implications for thousands of businesses, changing the way holiday pay is calculated for staff who work irregular hours on permanent contracts, and with significant financial implications for many.
How the case unfolded
Leslie Brazel was employed by Harpur Trust as a visiting music teacher – she joined the Trust in 2002 on a permanent contract of employment. Because she taught during term-time only, and her working hours varied week to week, her hours were classed as irregular. Originally she was paid holiday pay three times throughout the year using what has been termed the ‘Calendar Week Method’ whereby pay was calculated according to the weekly average pay spanning the previous 12-week period.
However, in 2011 the Trust changed its way of calculating holiday pay. Instead, they began to calculate her pay according to 12.07% of her usual pay; a method referred to as the ‘Percentage Method’. Harpur Trust claimed that, in changing the approach, they were following ACAS guidance.
The new calculation meant that Mrs Brazel was being paid less than she had previously received and in 2015, she raised the issue at an Employment Tribunal.
Her unlawful deductions from wages claim was unsuccessful but she appealed successfully to the Employment Appeal Tribunal. The court of appeal then permitted Harper Trust’s appeal in 2019 on the basis that term-time workers should remain entitled to the full 5.6 weeks paid leave entitlement.
The Court of Appeal advised that the correct way to calculate holiday pay was to determine the workers’ weekly pay according to Section 224 of the Employment Rights Act 1996 and to multiply it by 5.6 weeks.
The practice of paying 12.07% of holiday pay within a workers’ pay is known as ‘rolled-up holiday pay’ and many organisations still use this method, including recruitment agencies and umbrella companies.
Holiday pay calculation ruled unlawful
Harpur Trust’s final appeal was heard by the Supreme Court on 9th November 2021, with its Judgment handed down on 20th July 2022 which ruled that the ‘Percentage Method’ of calculation was unlawful.
It determined that using the 12.07% calculation of a worker’s pay for the purposes of determining 5.6 weeks’ leave entitlement directly contravenes the wording in the Employment Rights Act 1996, which sets out the calculation of a week’s pay for those with ‘no normal working hours’.
Implications for businesses
The decision carries significant ramifications for the thousands of companies with staff on permanent contracts who don’t have regular working hours and who may not work each week of the year.
Now, businesses with workers on permanent contracts will need to calculate a weeks’ pay by calculating average pay across the previous 52 weeks, excluding those weeks when work wasn’t undertaken.
Employees could attempt to claim for two years’ backdated holiday pay if they believe that it has been calculated incorrectly; something that could leave thousands of companies with an unexpected salary bill.
It also leaves businesses open to potential legal challenge – companies and organisations should complete an audit as quickly as possible to check whether any of their employees have been underpaid in previous years and consider rectifying any discrepancies. Failing to correct pay discrepancies that could now be considered underpayment could open the door to unlawful deductions from wages claims.
The Supreme Court has acknowledged that the use of the “Calendar Week” method may see permanent workers who work irregular hours being paid proportionately more holiday pay than those who work full time. Understandably, this may lead to issues with perceived unfairness, which businesses will also now have to manage within the team.
The ruling will see major changes in the way holiday pay is calculated in the future and creates work for those who have employed staff on this basis and used the ‘Percentage Method’ of calculation in the past. It’s important that businesses get to grips with the new rules and understand what it means for their business as quickly as possible- failing to do so could bring even costlier implications.
