Trouble with holiday pay

8 May 2018

Background

In these days of flexible working, part-time employment and job shares, it is extremely important for employers to get their calculations of their employees’ pay correct. Mistakes can be costly, not only in terms of legal fees, arrears of pay and the setting of undesirable precedents, but also in terms of the loss of staff goodwill and productivity. It is surprising therefore that we still come across employers who don’t take the trouble to issue contracts of employment, or more commonly, don’t ensure that their contracts are drawn up to cover various issues that regularly cause disputes.

The recent Employment Tribunal Case of Brazel v The Harpur Trust has highlighted problems with the calculation of holiday pay, a matter that in our opinion, should be spelt out clearly in an organisation’s terms and conditions of employment.

To set the scene it is useful to note that are two factors that need to be agreed between an employer and his employee: – the entitlement to paid holiday in terms of hours, days or weeks, and the rate of pay during paid holidays.

The amount of paid holiday

For full-time workers the amount of paid holiday is usually straightforward, although even in these cases there can be scope for disagreement. For example we would recommend that an employer should have a policy for dealing with cases where an employee fails to take his full entitlement during a year – should he carry it forward to the next holiday year or be paid for it?. If he is paid, at what rate?

Under Working Time Regulations the standard working year is 46.4 weeks (52 weeks less 5.6 weeks’ holiday entitlement). This means that employers are obliged to allow at least 5.6 weeks’ paid holiday for a full-time worker. Since 5.6 is 12.07% of 46.4 this factor is routinely used to calculate holiday entitlement and can easily be used for part-time or casual workers on a pro-rata basis. It should be noted that this is a statutory minimum; employers can offer longer periods of paid holiday if they wish.

The rate of holiday pay – what is normal remuneration?

Problems can arise, however, if the principles applied to paid holiday entitlement are applied automatically to the rate of holiday pay, especially for casual and part-time staff. Two well-known cases, Lock v British Gas and Fulton v Bear Scotland, have more or less settled the matter of what is to be taken into account when establishing the rate of holiday pay.

Workers must receive their ‘normal remuneration’ during their annual leave. Case law has established that this includes payments which are intrinsically linked to the performance of the worker’s tasks required to be carried out under the contract of employment. Furthermore, according to the Bear Scotland case, payments must have been made for a sufficient period of time to count as normal remuneration. Payments which should be taken account of in the calculation include:

  • Compulsory overtime (whether guaranteed or not)
  • Travelling time allowance
  • Night working premiums
  • Stand-by and emergency call-out payments
  • Commission

What is not included in normal remuneration?

Payments made to reimburse occasional or ancillary costs arising at the time of performance of tasks should not be included, e.g. the cost of a train ticket.

Irregular hours

Difficulties may arise where an employee does not work regular hours. What period of time is used to establish the rate of pay for the holiday entitlement? The Employment Rights Act 1996 states that the period is 12 weeks. In other words the average rate of pay for the 12 weeks immediately prior to the commencement of the holiday, inclusive of those other payments listed above, forms the basis of the calculation of the holiday pay rate.

The Brazel v The Harpur Trust case was brought by a music teacher under a casual contract. Mrs. Brazel worked mainly during term time, usually 32 weeks per year, and her contract allowed the statutory minimum of 5.6 weeks’ holiday per year, which she was required to take in the school holidays. The employer, The Harpur Trust, calculated her rate of holiday pay as 12.07% of her annual earnings, but Mrs. Brazel claimed that this produced an unfair result because she worked only 32 weeks, not the expected 46.4 weeks envisaged by the Working Time Regulations. So if the percentage were used it should be 5.6 weeks out of 32 or 17.5%. She therefore claimed that the 12 week rule should be applied, but the employer disagreed, stating that Mrs. Brazel’s holiday pay should be reduced pro-rata because she worked fewer weeks than the standard working year, and that not to do so would grant her a rate of holiday pay above that of employees who were not on term-time contracts.

The Employment Tribunal agreed with the employer and dismissed the claim, but Mrs. Brazel appealed to the Employment Appeals Tribunal. The EAT found in Mrs. Brazel’s favour, ruled that the 12 week average rule should apply and that it was irrelevant that this produced an effectively higher rate of holiday pay for term-time employees.

Another point that was established by the case is that in working out the average pay over the last 12 weeks, employers should only take into account those weeks in which the employee actually worked.

In conclusion

It could be argued that this case is of limited relevance, and that it can be disregarded except by those in the education sector who may employ casual term-time workers. It does serve, however, as a useful reminder that while determining the hours of holiday accrued can still be done using the 12.07% rule, working out holiday pay for those employees who work less than a standard year should be based on an average of the previous 12 weeks.

The case is also a reminder of the complexities of employment law and of the advisability of having robust employment contracts in place. Contractual gaps or areas of doubt can easily lead to disputes.

If you are an employer and have doubts over your holiday pay calculations we can assist you. We strongly advise that you check that all of your staff have signed contracts, and also that your terms and conditions of employment are up-to-date in the light of current legislation and recent case law. For this we can introduce you to a trusted expert. Please do not hesitate to get in touch.