UK government plans to revamp holiday pay calculation for part-year workers

The UK government has opened a public consultation on calculating holiday entitlement for part-year workers who are employed on a contract which lasts for a full holiday year, such as term-time workers in the education sector and zero-hour workers. The proposals (31-page / 288KB PDF) seek to ensure that annual leave entitlement and holiday pay received by workers is proportionate to the time they spend working.

Currently, there is a disparity in holiday pay and entitlement between part-year workers and comparable part-time workers, with the former potentially being entitled to proportionately more pay and leave than the latter. It has become a growing concern among employers after a recent Supreme Court judgment, known as the Harpur decision, which is said to have increased costs for businesses and organisations.

In July 2022, the court ruled that workers who are only employed during some weeks of the year, but who have a contract which lasts for the full year, are entitled to a full year’s statutory holiday entitlement, which is 5.6 weeks per annum. It rejected the arguments that employers should be able to reduce part-year workers’ holiday entitlement on a pro rata basis to account for weeks they have not worked. 

The dispute centred around the application of the UK’s Working Time Regulations (WTR) – legislation that has its origins in EU law. The WTR do not expressly set out how to calculate holiday entitlement for part-year workers on permanent contracts. However, the Supreme Court ruling left employers with an anomaly around leave for part-year workers, who can be entitled to receive more holiday entitlement (pro rata) than a comparable full-year worker.

According to the consultation paper, workers on permanent contracts who work for just a few weeks each year would receive the largest increase in holiday pay disproportionate to their hours worked following the Harpur decision.

The government’s consultation proposes a number of potential solutions to fix the issue. Firstly, the consultation proposes legislation which would change the current calculation method set out in the WTR to provide different calculation methods for holiday pay and for leave entitlement.

Under the proposed legislation, holiday pay would continue to be calculated using a 52-week reference period, discounting weeks where no work is done. So a worker would continue to be paid a week’s pay for a week’s leave. In terms of leave entitlement, it is proposed that the calculation would move to a 52-week period, including weeks where no work is done. This effectively pro rates leave entitlement to the proportion of the year actually worked.

Annual leave entitlement for part-year workers and workers with irregular hours would be calculated by reference to a “fixed reference period” which would calculate entitlement based on time worked in the previous holiday year. The government proposes a two-step calculation method. Employers should first calculate the total hours a worker has worked in the previous holiday year, including those weeks without work; then multiply the total hours worked by 12.07% to give the worker’s total annual statutory holiday entitlement in hours for the current year.

Employment law expert Sue Gilchrist of Pinsent Masons said: “The government has recognised the difficulties employers face in calculating leave ahead of every time an individual worker requests holiday, and proposes a fixed reference period calculated at the beginning of each new leave year, based on the previous 52 weeks. This looks like a helpful mechanism for employers, although as ever, with any change to the WTR, there may be some unintended consequences for individual circumstances.”

One of the unintended consequences of calculating leave on a backward-looking basis is that workers may not be entitled to as much leave for the current year as they might feel they ‘should’ be, if they work for more months in the current year than the previous year.

“Any changes to the law would have to make clear that this is the case if we are to avoid further litigation around entitlement,” said Gilchrist. 

The consultation paper also contains provisions covering how to calculate a day’s leave, leave during the first year of employment, and leave for agency workers.

“The fact that the government is looking to update how leave is calculated perhaps also indicates that the government doesn’t intend to replace the WTR wholesale at the end of 2023 as part of its removal of all retained EU law,” added Gilchrist. 

“Employers will keenly await the consultation response, although it’s highly likely that any ‘fix’ won’t be retrospective,” she said.

In the consultation paper, the government estimates that between 320,000 and 500,000 permanent term-time and zero-hours contract workers would receive more holiday entitlement following the Harpur decision. Around 37 per cent of these are workers in the education sector, such as teaching assistants who are employed on part-year contracts. It also estimates that there are between 80,000 and 200,000 agency workers who may receive more holiday entitlement under this judgment.

The consultation will close on 9 March 2023.