The Court of Appeal recently confirmed that employers should calculate holiday pay for term time only workers, who work variable hours on the basis of an average assessed over a twelve week period prior to leave being taken. Employers will therefore need to abandon the common practice (recommended by ACAS) of basing holiday pay for those employees on 12.07% of earnings.
The decision is likely to increase salary costs. The required approach of applying a twelve week average will typically produce a higher holiday pay figure than is produced by applying the 12.07% formula.
In this particular case, the employer argued that the 12.07% formula was consistent with the principle of pro rata entitlement and that this should be applied to term time only (or “part year”) workers in the same way it is required to be applied to part time workers. The Court of Appeal rejected that proposition. Instead they regarded the requirement under the Employment Rights Act that, when calculating a week’s holiday pay for an employee with variable hours, a 12 week average be applied as clear.
The decision will be of relevance not only to employers in the education sector but also other sectors where employees are engaged on permanent contracts but work part of the year only.
It raises some interesting questions. The decision does not seem to affect term time workers who work fixed hours. The calculation of the holiday entitlement of those employees involves no averaging process. They are entitled to the amount that would be payable if they worked their normal hours for a week. That may encourage employers to move term time only workers from variable/flexible hours contracts to contracts with fixed hours, so as to avoid the need to apply an average. However that would be at the cost of losing the flexibility that casual or zero hours currently gives the employer.
Typically an employee who does not work outside of term time is not required to specify which weeks of the holiday period are being taken as annual leave. It now becomes relevant to identify which weeks are being taken as annual leave in order to identify the twelve week reference period.
Some employees, for now, may elect to take annual leave at a particular time so as to maximise the twelve week average. Similarly, canny employers may require employees to take annual leave at a time which minimises the twelve week average. Those possibilities however largely evaporate in April 2020 when the reference period to be used for averaging purposes is increased from twelve weeks to 52 weeks.
For now, the instant impact is likely to be an increase in the holiday pay bill for employers.
If you would like to dicuss the changes around holiday pay in more detail or you have any other enquiries in realtion to the above article, please contact Simon Bellm, Partner in the Employment Team.