Holiday Pay: Where are we now?

Introduction

In 2022, Harpur Trust v Brazel [2022] UKSC 21 brought unwelcome news for employers who had become accustomed to applying a pro-rata percentage to workers’ annual leave entitlement.  More recently, in Chief Constable of Police Service of Northern Ireland and Another v Agnew and Others [2023] UKSC 33, the Supreme Court has confirmed that the different types of leave (see below) all form part of a composite ‘pot’.  In November 2023, the Government has produced draft regulations aimed at simplifying matters (The Employment Rights (Amendment, Revocation and Transitional Provisions) Regulations 2023) (“the Draft Regulations”).  So where exactly does this leave us?

Calculating Holiday Pay for Part-Year Workers

Harper Trust v Brazel was a blow for many employers with workers who did not work the full number of weeks in the year.  Employers like Harper Trust have been calculating 12.07% of the total number of hours worked, then multiplying this by the hourly rate.  That, however, failed to take account of accumulation of leave during weeks that were not worked.  In a nutshell, the Supreme Court held that this ‘Proportion Method’ was not compatible with the requirements of the ERA 1996.  Accordingly, it held that the ‘Calendar Method’ is appropriate: working out the total number of hours worked over the reference period, excluding any full weeks where no work was done.

The Government has now proposed legislation in response to this judgment.  The Draft Regulations are expected to come into force on 1 January 2024 but, in respect of holiday, will only affect holiday years beginning on or after 1 April 2024.  The Draft Regulations permit employers to calculate accrual as 12.07% of hours worked during the pay period (new Regulation 15B of the WTR.

Agnew

The focus of the Agnew judgment was, not surprisingly, on whether a break of three months between holiday pay underpayments prevents an underpayment being part of a ‘series’ (it does not).  However, towards the end of the judgment the Supreme Court turned its attention to the different types of annual leave and whether leave must be taken in a particular sequence.  As is widely known, under Regulation 13 of the WTR, workers are entitled to 4 weeks’ annual leave, derived from the minimum leave requirement set out in the Working Time Directive [2003/88/EC] (“the Directive”).  The further 1.6 weeks’ entitlement is set out in Regulation 13A of the WTR.

The distinction between the different entitlements is not academic.  It makes a difference on carry over of leave.  One can also, for example, consider what constitutes a week’s pay under Regulation 16 of the WTR.  According to Bamsey and Others v Albon Engineering and Manufacturing PLC [2004] EWCA Civ 359, section 234 of the ERA 1996 is applicable and excluding voluntary overtime was lawful.  However the Court of Appeal has held that, so far as EU law (i.e. the Directive) is concerned, ‘normal pay’ does not require payments to be compulsory under the contract (East of England Ambulance Service NHS Trust v Neil Flowers and others [2019] EWCA Civ 947).  Caselaw therefore suggests that for leave derived from the Directive (Regulation 13), overtime can be taken into account if regular and/or recurring, whereas Regulation 13A requires it to be contractually guaranteed by the employer and compulsory for the employee.  The approach in Flowers is reflected in the Draft Regulations. In a new Regulation 16(3ZA), in respect of entitlement under Regulations 13 of the WTR and (the new) Regulation 15B, a week’s pay includes (amongst other things) overtime payments which have been paid regularly in the 52 weeks preceding the calculation date. 

Is Regulation 13 and 13A leave to be taken in sequence or considered as a ‘composite pot’? According to Agnew, “a worker is entitled to enjoy leave from whichever legal source it may be derived and that there is no requirement as a matter of law that the leave derived from different sources must be taken in a particular order”.  Furthermore, “workers are likely to look at their annual leave entitlement as a composite whole”.

This does leave employers with a potential headache.  They could simply operate a ‘composite pot’ in its simplest form: treating all leave the same, no matter the source.  This, however, would require them to afford workers with the more generous aspects across the board (see calculation of a week’s pay, above), regardless of the source of the leave.  Alternatively, employers could consider treating the different aspects as they have been, but combining the leave itself into a pot and dividing it between the different types of leave each time that entitlement is exercised.  That, however, might be an administrative nightmare.

The solution may lie in paragraph 137 of the judgment: “if and in so far as it is not practicable to distinguish between different types of leave then all the leave to which the worker is entitled must form part of a single, composite pot…” [emphasis added].  When does it become practicable to distinguish? That remains to be seen, and the judgment offers no guidance.  Clear contractual clauses may be sufficient, setting out the entitlement, its source, how it is to be treated, and in what order it must be taken.  It seems that firm contractual direction is going to be the minimum required by Tribunal’s following Agnew. 

And in Other News

The draft Regulations permit rolled up holiday for irregular hours or part-year workers, if holiday pay is calculated at 12.07% of all pay for work done, if the additional 12.07% is paid at the same time as pay for the work done, and if the holiday pay is itemised separately (new Regulation 16A).