Payroll: the effects on organisations in terms of holiday entitlement and pay

Two recent court cases may have financial repercussions for employers within the UK.

Both cases have yet to reach the Supreme Court, however, it may be prudent to make some financial provision or take other necessary actions as a precautionary measure.

Calculation of holiday for term-time workers

The first case with possible financial and contractual implications is that of The Harpur Trust v Brazel

The claimant, Mrs Brazel, was a part-time music teacher who worked varied hours per week (as agreed at the beginning of each term) and term time only (typically 32 weeks of the year). Though she worked irregular hours and term time only, the employer issued a permanent contract.

When calculating her holiday entitlement the Trust used the method recommended by Acas. With this method, the percentage to use was 12.07 of the hours worked (5.6 weeks /46.4 weeks).

Mrs Brazel contended that holiday should be calculated by taking a week’s pay (the average of the weekly pay for the 12 weeks prior to the calculation date) and multiplying that by the statutory 5.6 weeks’ entitlement as laid out in the Working Time Directive (WTD). Using this method the percentage increased to 17.5

Employment Appeal Tribunal

When Mrs Brazel’s argument was rejected she took her grievance to The Harpur Trust but was unsuccessful. She next went to the Employment Tribunal who dismissed her case. Undeterred, she persisted and took her case to the Employment Appeal Tribunal (EAT). Here the appeal was upheld.

The Court of Appeal confirmed the EAT judgement when the EAT judgement was challenged by the trust. The Court of Appeal judge, Lord Justice Underhill ruled that there was no requirement to pro-rata the entitlement of ‘part-year’ workers to that of ‘full-year’ workers.

The result of the above ruling means that employers will need to consider whether any back pay is due and whether any future liability may arise. The employer should also review all relevant contracts and revise as necessary.

However, employers may want to wait to see if this case progresses to the Supreme Court before taking any action.

Holiday pay calculation

The second case of interest is that of Alexander Agnew and others v Chief Constable of the PSNI (Police Service of Northern Ireland). The findings from this case, though currently limited to Northern Ireland, could mean a possible liability for UK employers if the decision is confirmed by the UK Supreme Court.

The case concerned the exclusion of certain allowances and overtime payments when calculating holiday pay for police officers and civilian staff. The total back pay bill, according to media reports, may cost the PSNI up to £30 million.

The key findings were:

  • That a claim for underpayment of holiday pay is not restricted by the three-month rule (Bear v Scotland ruling)
  • Correct payment of overtime may not break a series of underpayments, whether they occurred before or after the correct payment.

These findings are contrary to the Bear v Scotland case in which it was determined that holiday pay underpayment could not be claimed where there has been a gap of more than three months between.

Leave being made up of WTD

The case also introduced the concept of each day of leave being made up of a percentage of the 20 days of European Working Time Directive (WTD) leave, eight days of UK Working Time Regulation (WTR) leave, and, where given, a percentage of any contractual leave in excess of the above.

This is contrary to established opinion where, if the employer has not specified, leave days are considered to be taken in a set order; WTD leave first, then WTR leave and then, if any, contractual leave. Because of this new ruling, potentially every day of leave attracts enhanced WTD rights.

If this case does proceed to the UK Supreme Court and the Court confirms the ruling then there could be financial repercussions for UK employers.

Key points

Neither of these cases have yet reached the Supreme Court so management may not want to make any definite process or calculation changes. However, it may be prudent to

  • Review the contracts of similarly positioned employees
  • Calculate any potential liability
  • Adjust any relevant contracts, seeking legal advice where necessary.

In summary

Both these cases, if confirmed by the Supreme Court, could result in significant financial costs for UK employers. It may be prudent to consider the implications for your organisation and where necessary, take the necessary actions to minimise exposure.

Further reading

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.

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