We have had a landmark ruling from the Supreme Court in relation to the calculation of holiday pay for part-year workers. If you do not employ part-year workers (e.g. term time only, zero hours or variable hours) then you can ignore this article. Permanent full and part-time staff that work throughout the year are not affected by this.
What has the court ruling changed?
You can no longer calculate holiday pay based on the 12.07% accruals or pay-as-you-go basis. This was a simple system whereby entitlement to holiday pay was calculated based on the full-time equivalent of holiday weeks per year divided by working weeks a year hence 12.07%. This was then applied to earnings to create an additional holiday pay element.
The Supreme Court has now ruled that the Calendar Week Method must be used for part-year workers taking an average of the last 52 weeks of paid work and that, if employed for a full year, they should receive a full 5.6 weeks of entitlement even if they have not actually worked throughout the full year.
A term-time only cleaner works 39 weeks of the year out of a possible 52. This is because the school is closed for the other 13 weeks. She earns £100 a week when the school is open. Under the 12.07% rule her holiday pay would have been:
£100 times 39 weeks giving £3,900 plus holiday pay at 12.07% giving £471. This reflects the fact that the employee has only worked 84% of the year.
Under the new ruling, she has been under an employment contract for a full year so gets 5.6 weeks based on her average weekly pay of £100 being £560.
Compare this with a cleaner who works in an office, getting £100 a week all year round. He earns an annual salary of £5,200 and of that £560 will be paid while he is on holiday. So although he has worked 8.4 more weeks a year than the school cleaner, he gets exactly the same amount of holiday pay.
Does this only affect those employees who are prevented from working the full year by nature of the employer requirements?
No, in the second scenario above (the office cleaner) if you had a second cleaner who only wanted to work in the school holidays because of his other working responsibilities, he works 13 weeks a year in the office cleaning job, he would still get the same holiday pay as the full year working cleaner (£560). So he could work 39 weeks in the school, 13 weeks in the office and earn total holiday pay across both employments of £1,120.
How does this impact zero-hours workers?
If a zero-hour worker is under contract/on the payroll for a whole year, they will be entitled to 5.6 weeks of average weekly pay for 5.6 weeks – even if they have only actually worked part of the year.
A life guard works 40 of the possible 52 weeks in the last 12 months before he goes on holiday taking his full 5.6 weeks for the year.
His average pay for those 40 weeks was £250 a week. For the 12 weeks with no work, we must go back to the previous year assuming he has worked long enough and substitute the 12 gap weeks with 12 paid weeks. The average for the latest 12 paid weeks in the previous year was £190. This gives him an average weekly pay for the previous 52 working weeks of £236. So his holiday pay should be paid out based on £236 a week so he gets £1,321.60 for the year. Compare this to the holiday pay for the year he would have got on the 12.07% method of (40*£250*12.07%) £1,207.
Help – what do we do?
In essence, what the new ruling is saying is that an employee continues to accrue a right to holiday whilst under an employment contract, even if not working. To mitigate this you could consider the following steps:
Short term contracts
If you only need someone to work variable hours for a specified period of time (such as over Christmas, or the summer holidays), issue a fixed term contract with a defined end date and ensure that you cease the employment at that time. This prevents accruing of holiday benefits whilst on the payroll but not working.
Stop zero-hours contracts
Consider whether you can offer staff a guaranteed number of hours each week rather than zero. This means that what would otherwise have been gaps (that would have to be substituted with a potential high earning week) become paid/working weeks albeit at perhaps a small amount. There must be clear agreement that these contracted hours will always be worked and always be paid for. Ideally, lock them on to a specific day or days so that the employee needs no defined instruction to turn up for work. If hours worked are consistently higher than the contracted hours, the averaging rule will still apply when calculating weekly pay for holiday pay purposes. However, you can be confident that you haven’t got any nil work gap weeks to substitute making the calculation easier and potentially cheaper.
Don’t keep zero-hours staff on payroll
If you have zero hours staff that are only available, say, whilst away from University or conversely whilst at University, cease their employment each time they go away. You can then re-employ them when they return. However, do be aware that if you do this for more than two years, continuous/permanent employment rights may vest.
The frustration with this ruling is not just the pain of the additional cost alone but the cost/effort involved in getting to the averaging figures in the first place. Remember that if we run your payroll monthly – we have no visibility on working/non-working weeks. If you want us to be able to do the weekly averaging calculations, we will need to be running these employees on a weekly payroll. Otherwise, you will have to refer to your own weekly time records to produce the averaging calculations.
Many large employers have been using the 12.07% accruals basis for zero-hour/variable workers. The hospitality sector, large retailers, public sector bodies such as NHS bank and many agency staff have all used this basis. There is clearly an argument that this ruling disadvantages those employees who work all year as against those who don’t (see earlier illustrations) so there may yet be more to tell on this story.
However this case has been settled in the Supreme Court – so the decision is final and will only be overturned as a consequence of new precedent in a new case or a change in the law. Like it or not, this decision is going to impact many employers now and for some time to come.
Please contact Niki for more information. Remember we are payroll experts, not HR advisors – always consult with your employment adviser as well as talking to us before altering or ceasing contracts of employment.