Harpur Trust v Brazel: the impact on organisations within the retail and hospitality sector

On 20 July 2022, the Supreme Court issued its long-awaited decision in the case of Harpur Trust v Brazel regarding the correct calculation of annual leave and holiday pay for employees with irregular working patterns.

The decision relates specifically to how to calculate how holiday should accrue.

Organisations operating within retail and hospitality who employ directly, or through agency or umbrella companies, part-year/seasonal workers such as front of house staff, warehouse staff, store assistants etc. on an overarching/permanent contract of employment should be aware of the implications this Supreme Court decision will have.

Upholding the decision of the Court of Appeal before it, the Supreme Court ruled that employees on permanent contracts who only work for part of the year, such as staff on the shopfloor or in warehouses who remain on a contract throughout the year but are only called in as and when required, should receive the same statutory holiday entitlement as employees who work the full year. In particular, the Court clarified that the 12.07% accrual method, which is commonly used to calculate holiday entitlement for employees with variable working hours, is not accurate when applied to “part-year” workers which includes workers on zero-hour contracts (assuming they don’t work every week of the year).

What does this mean?

It is important to note that the principles in this case apply to individuals who are engaged under a “permanent” contract which continues even during periods when the individual isn’t working.

It is commonplace in retail and hospitality for organisations to engage seasonal workers to account for the increased demand during peak seasons – school holidays, bank holidays, Christmas etc and therefore these individuals do not work all year round or have breaks in their working pattern. If those individuals are engaged under permanent contracts, then they are entitled to 5.6 weeks’ holiday per year, paid at the rate of their average weekly wages, even if there are significant parts of the year when they do not do any work. Considerations for organisations within retail and hospitality when employing directly or through third party recruitment organisations are noted below.

Engaging directly

Prior to the Supreme Court’s judgment, the commonly used method for calculating holiday pay for staff with variable working hours was to accrue holiday pay at the rate of 12.07% of wages. This accrual method was developed to assist in the calculation and administration of holiday pay through payroll, although it should be noted that this was always simply a rule of thumb and was not the calculation set out in the legislation. The Supreme Court decision, detailed below, has confirmed that this 12.07% accrual method does not reflect the intention of the law and in some circumstances, particularly where staff work part-year, can cause incorrect results. Organisations which engage part-year/seasonal workers under permanent contracts should:

• re-think whether permanent contracts are appropriate where work is only undertaken during part of the year;

• conduct an internal audit to understand the extent to which holiday pay may have been underpaid and whether the shortfall should be paid out; and
• consider what calculation method should be used going forward.

Engaging through agency or umbrella companies

For organisations that engage workers via recruitment companies, it is likely that these recruitment companies will be amending the contracts they use to engage/employ staff and may also be amending the holiday accrual rate from 12.07% to a higher figure. This may cause an increase in the overall fee payable to account for these changes and thus the overall cost of the staffing bill.

The Case

Facts

The case was originally brought by Mrs Brazel, a clarinet and saxophone teacher employed by Harpur Trust. Mrs Brazel’s working hours varied each week. She also did not give any lessons during the school holidays, so she only worked during term time. On average, Mrs Brazel only worked 32 weeks out of the year. Importantly however, even though Mrs Brazel didn’t work all year round, she had a permanent contract of employment with the Trust which continued during the school holidays when she did not work (sometimes referred to as an “umbrella” or “overarching” contract). This can be contrasted with a “casual” or “bank” worker who is only engaged on an assignment-by-assignment basis, with no overarching contract continuing in-between assignments.

Since Mrs Brazel was employed under an overarching contract but had periods in the year when she did not work, the Court described her as a "part-year worker", compared to a "full-year worker” who works during all the weeks of year (apart from when they are taking holiday).

At the end of each school term, Mrs Brazel took her accrued holiday and the Trust paid her holiday pay based on 12.07% of the pay which she had earned that term.

Mrs Brazel brought a claim arguing that she had been underpaid holiday pay. Specifically, she argued that the 12.07% method is not set out anywhere in the Working Time Regulations 1998 (“WTR”). In fact, the WTR simply provide that a worker is entitled to 5.6 weeks' annual leave in each leave year, paid at the rate of a week’s pay for each week of leave. For someone with variable working hours (such as Mrs Brazel), a week’s pay is calculated as the average of the total pay received in the previous 52 weeks (this used to be the previous 12 weeks until the law changed in 2020). Mrs Brazel argued that a very simple calculation was therefore required; the Trust should multiply her average week’s pay by 5.6 and that would produce her holiday pay entitlement for the year. By using the 12.07% method however, this produced a lower overall holiday pay figure. This is because by using that method, her holiday entitlement for the year was pro-rated by reference to her actual working time, whereas she argued that she should receive the full 5.6 weeks’ holiday (and holiday pay) regardless of the fact that there were a significant number of weeks in each year when she did not do any work.

The Trust argued that Mrs Brazel’s annual leave entitlement should be reduced according to the number of weeks she actually worked, otherwise she would get an unfair advantage because she would receive the same 5.6 weeks’ paid holiday entitlement as someone who worked all year round. For example, it would mean that an exam invigilator, who only works three weeks a year but is employed under a contract for the whole year, would be entitled to 5.6 weeks’ holiday, paid at the rate of their average weekly earnings in the three weeks they worked, which is the same as someone who works all year round. 

Judgment

The Supreme Court agreed with Mrs Brazel and rejected the Trust’s appeal. As the highest court in the UK, this is the final decision on the matter.

The Supreme Court did accept, like in the example of the exam invigilator, that allowing part-year workers to have the same entitlement to 5.6 weeks’ holiday as full-year workers, could produce “odd results” in extreme cases, but said that general rules sometimes do produce anomalies. The Supreme Court rejected the various alternative methods for calculating holiday pay which had been put forward by Harpur Trust, including the 12.07% method, stating that aspects of the Trust’s proposed methods were “directly contrary to what is required by the statutory wording and the WTR”.

If you believe this decision may affect your organisation or you would like further advice, please contact Simon Whitehead (recruitment), Siobhan Howard-Palmer (retail) or Hannah Morrison (recruitment).