Are you calculating holiday pay correctly?

13 March 2018

The case L Brazel v The Harper Trust heard by the Employment Appeal Tribunal (EAT) ruled that paying 12.07% of annualised hours is not always the correct method for calculating holiday pay.

The Claimant, Mrs Brazel, was a visiting music teacher engaged on a zero-hours contract. Her contract reflected her statutory entitlement to 5.6 weeks’ annual leave that she had to take outside of term time. The Respondent paid her 12.07% of her annualised hours for periods of annual leave which was paid in 3 instalments.

The Claimant did not believe her holiday pay was calculated correctly and claimed an unlawful deduction from wages.

The Employment Tribunal ruled that the statutory entitlement to 5.6 weeks holiday pay per annum should be pro-rated so that the entitlement to holiday pay is based on the number of weeks actually worked as a proportion of 46.4 weeks (52 weeks less 5.6 weeks statutory leave). In the Claimant’s case, a school year varies between 32 and 35 weeks. 

In this regard, the Employment Tribunal agreed with the Respondent’s approach, which was taken in accordance with ACAS guidance, of paying 12.07% of annual hours for their casual employees.

The Claimant appealed to the EAT which found in the Claimant’s favour and upheld the appeal. The EAT disagreed with the Tribunal’s ruling that there was a need to pro-rata holiday and instead, found that anyone who engages individuals who have no normal working hours should apply section 224 of the Employment Rights Act 1996 (‘ERA’). Section 224(2) of the ERA states a normal week’s pay is based on the pay received in the 12-week period prior to taking annual leave.

The EAT did not understand the Tribunal’s rationale regarding the need to pro-rata holiday but acknowledged that the application of section 224 of the ERA could cause anomalies such as favouring someone who does not work throughout the year. Legislation, in the form of the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, dictates that part-time workers are not to be treated less favourably than full-time workers, however there is no principle to the opposite effect.

The EAT directed that the case be remitted to the Tribunal for computation of the sums due to the Claimant by application of section 224 of the ERA. The EAT stated it should do so on the basis that, should the resulting sum be greater than the sums actually paid, there will have been a deduction from wages.

Aspire Comment

If you have been applying ACAS’ recommended 12.07% principle when calculating holiday pay for workers with irregular working hours, you must assess whether there has been an underpayment and consider changing your processes in the future.

Ultimately, holiday entitlement of 5.6 weeks is equivalent to 12.07% of hours worked over a year (5.6 weeks holiday divided by 46.4 weeks (being 52 weeks – 5.6 weeks)). Therefore, the 12.07% principle can be used to calculate holiday entitlement for those who have no normal working hours.

For example, if someone works 20 hours, they are entitled to;

12.07/100 x 20 = 2.41 hours holiday entitlement (145 minutes)

However, in accordance with the EAT decision, the same principle should not be used when calculating holiday pay. Instead, for those who have no normal working hours, an average of the previous 12-weeks’ pay should be paid during statutory leave entitlements in accordance with section 224 of the ERA.

The calculation of holiday pay can be difficult to get right, especially considering the vast amount of case law surrounding the topic recently concerning commission and overtime payments. However, this makes the matter all the more important to understand and ensure you are calculating holiday pay for your employees correctly to avoid an Employment Tribunal claim.

It is standard practice in the temporary labour industry to accrue holiday pay on the principle of 12.07% of pay, albeit that the definition of ‘pay’ for this calculation can vary. This is not technically correct. The 12.07% calculation should actually only identify the period of annual leave that the individual is entitled to take. Calculation of the amount of holiday pay should always revert to the average of the previous 12-weeks’ pay to be technically correct.