Supreme Court ruling on holiday pay: What recruitment agencies need to know

A recent ruling from the Supreme Court about holiday pay will affect recruitment agencies that use:

• the ‘12.07%’ approach to calculating holiday pay; and
• permanent contracts to employ agency workers who have no fixed hours.

The July 2022 decision found that annual leave entitlement cannot be pro-rated for a part-year worker employed under a permanent contract. The lawful method for calculating holiday entitlement and pay is set out in the Working Time Regulations (WTR) and the Employment Rights Act 1996 (ERA).

Background

Mrs Brazel, a music teacher, was employed under a permanent contract at a school run by the Harpur Trust. The contract entitled her to 5.6 weeks’ holiday a year. She was contracted to work only during term time and was treated as taking her annual leave in three equal tranches during the winter, spring and summer school holidays.

Since 2011, the Trust had calculated Mrs Brazel’s holiday pay by taking 12.07% of the total hours she worked each term. It then paid her the hourly rate for that number of hours.

This was the method set out at the time in the ACAS guide for calculating holiday pay for casual workers. 12.07% is derived from the proportion of statutory leave compared to the total working weeks of the year (5.6 weeks’ statutory leave; 52 weeks in a year; 52 – 5.6 = 46.4 working weeks of the year; 5.6/46.4 = 12.07%).

Harpur Trust’s key arguments for this being a lawful basis on which to calculate holiday pay were:

• the leave requirement accrues in proportion to the time the worker works – essentially, the leave requirement for part-year employees should be pro-rated to allow for the weeks in which they are not required to work; and
• the pro rata principle set out in the Part-time Workers (Prevention of Less Favourable Treatment) Regulations (PTWR) should apply – the purpose of the PTWR being to prevent employers from discriminating against part-time workers.

Mrs Brazel disagreed and brought an unlawful deduction from wages claim in respect of underpaid holiday pay. Her position was that the use of the 12.07% approach undercalculated her holiday pay when compared to the methodology set out in the legislation. She won at the Court of Appeal, and the Harpur Trust then appealed to the Supreme Court.

The Supreme Court’s decision

The Supreme Court dismissed the Harpur Trust’s appeal and agreed with Mrs Brazel: a part-year worker’s annual leave entitlement is not required to be pro-rated to that of a full-time worker.

The WTR is the legislation concerning annual leave entitlement for workers in the UK. The WTR implemented the EU law that obliges member states to provide all workers with at least four weeks’ annual leave.

Crucially, EU law allowed member states to make the leave entitlement more generous if they wished, and so the UK increased the annual leave entitlement to 5.6 weeks. Although the UK has left the EU, it is still bound by EU law concerning annual leave and applicable cases concerning its meaning.

Section 224 of the ERA sets out the calculation method of a week's pay for workers with no fixed hours. This is referred to by the WTR as the method to be used for calculating holiday pay. Section 224 states that a week’s pay should be calculated by taking an average of the worker’s pay over the preceding 12 weeks. (Since 6 April 2020, this reference period for statutory annual leave pay has increased to 52 weeks.) A defining feature of s224 is that weeks where the employee is employed but receives no remuneration are ignored.

It was accepted that this method will put Mrs Brazel in a more favourable position than some full-time workers, but this was not a sufficient reason to justify departing from the legislation, and a more generous entitlement did not infringe EU law.

Also, in contrast to the calculation of a week’s pay for annual leave, there is no provision in the WTR to exclude weeks where no work is performed from the entitlement to annual leave calculation – meaning, therefore, that the UK parliament had made a policy choice for the two calculations to be treated differently.

What does this mean for recruitment agencies?

While the case concerned a term-time only worker, it will have consequences for recruitment agencies that employ agency workers with irregular hours on permanent contracts of employment. The message from the Supreme Court is quite clear – the entitlement calculation for annual leave and the calculation for holiday pay are different, and the 12.07% calculation methodology does not comply with the legislation.

Following the Court of Appeal’s judgment in this case back in 2019, ACAS guidance on holiday pay removed the reference to the 12.07% calculation, and BEIS subsequently issued new guidance for workers with no fixed hours or pay.

Consequently, recruitment agencies who continue using the 12.07% calculation methodology for holiday accrual and holiday pay calculations, instead of the requirements of the WTR and the ERA, run a high risk of being non-compliant and potentially underpaying holiday pay.

That risk will only grow if the government proceeds with its stated commitment to introducing a single enforcement body to police rights such as holiday pay.

Actions recruitment agencies should consider

1. Review agency worker agreements to check if they are employed under permanent contracts of employment.
2. Review the potential for any historic liability arising from the permanent employment of agency workers with irregular working hours.
3. Ensure HR and payroll processes are updated to calculate the agency worker's holiday accrual entitlement in accordance with the WTR, and their holiday pay entitlement in accordance with the ERA. This will require being able to look back at up to 104 weeks’ worth of pay data for each worker.
4. Engage all stakeholders (legal, HR and payroll) to ensure contractual engagement processes are in place to ensure permanent employment is not offered without prior approval to agency workers with irregular working patterns.

To discuss how this decision may affect your organisation, please contact Charlie Barnes.