Paul Ball: Proposal to change holiday pay calculations begins

holiday Since the introduction of rights to paid annual leave under the Working Time Regulations 1998 (WTR), the number of workers who have irregular hours or are on term-time contracts has increased to more than 5.3 million.

The WTR guarantee all workers at least 5.6 weeks of paid holiday per year. However, in July 2022, the case of Harpur Trust v Brazel the Supreme Court ruled that under the WTR, part-year workers are entitled to a larger holiday entitlement than part-time staff who work the same total number of hours across the year. This is due to the finding that there should be no reduction in their entitlement to take into account weeks in which no work was carried out, in contrast to the pro-rata reduction that is applied when a worker only does part-time hours in the course of the working week.

The difference in the holiday pay costs for most employers was significant, but for some which relied on a large number of part-year workers, the change has had a detrimental impact on costs at a time when most employers are attempting to reduce them.

Proposals have now been put forward to address this disparity and to ensure that holiday pay entitlement received by workers is proportionate to the time they spend working. The government’s best estimate is that the change will save employers around £149 million in costs.

The workers most likely to see their holiday pay entitlement reduce under the proposed changes are staff in the education sector, zero-hours workers and those on agency contracts. Those that work the fewest weeks in the year will see the biggest reduction. If, for example, a permanent employee worked only one week of the year and earned £1,000, following the Brazel ruling they would then be entitled to 5.6 weeks (notional) annual leave, for which they would receive £5,600.

If the changes are made, employers may revert back to adding a 12.07% premium to an employee’s pay to reflect that their accrual of holiday entitlement is directly linked to the amount of work done. This previously worked mathematically on the basis that during the year there were 52 weeks in which work could be carried out. Take from that the 5.6 weeks statutory holiday period and it would leave 46.4 weeks, which divided into 5.6 gave the percentage of 12.07. If this was paid in addition to the amount earned, the employer’s liabilities in respect of the statutory holiday pay accrued were met and meant payroll calculations were easy.

Consultation on the proposals will continue until 9 March 2023, at which point new legislation may get the go-ahead.

Paul Ball is an employment partner at Gateley Legal