Major Payroll Changes for Businesses on Employee Holiday Entitlements

November 7, 2022 3:42 pm Published by

waitress in resturant taking an order

A landmark judgment by the UK Supreme Court on employee holiday entitlements in July will have a significant impact for businesses operating across many sectors.

The judgment in the Harpur Trust v Brazel case means that workers on permanent part-year contracts, such as term-time-only teachers, could be entitled to back pay.  In the main, in addition to education, this will impact businesses in the hospitality, retail, healthcare and leisure sectors where there is a dominance of casual or seasonal workers (including umbrella contracts).

What the Judgment means in plain language

Let’s take a step back to understand the case that led to this judgment in more detail.

Ms Brazel was a music teacher employed under a permanent zero hours contract who worked irregular hours during the school year for The Harpur Trust, varying between 32 and 35 weeks.

The Harpur Trust calculated her holiday pay entitlement at the end of each term on a pro rata basis by calculating 12.07% of the hours she worked in the preceding term.   Ms Brazel argued that the Harpur Trust was wrong to calculate her holiday pay in this way and should apply the “Calendar Week Method” of calculation which, if used, would have increased the amount of holiday pay she was entitled to.

An unlawful deductions claim was brought to the Employment Tribunal for the difference, but this was dismissed. Ms Brazel appealed and won at the Court of Appeal and this decision was then subsequently upheld by the Supreme Court.

The judgment confirmed the existence of a new category of worker i.e. a “part-year worker”, defined as someone who works varying hours during specific, agreed weeks of the year, but remains employed and available for work throughout the relevant period (which has been a common model in the past for many “umbrella” companies).

It ruled that employees working under such arrangements must now receive the same amount of paid annual leave as those working a full year (5.6 weeks per year), and organisations that previously calculated holiday pay on a pro-rata basis could be liable for claims of underpayment.

In other words, all such workers are entitled to the same amount of leave regardless of how many weeks per year they work.   The ruling states that employers can no longer use a pro-rata method to calculate holiday leave or pay for permanent workers on irregular hours.  Continuing to do this may mean you’re illegally underpaying staff.

Where does this leave employers on holiday entitlement and pay?

Employers who engage ‘casual’ workers on zero hours contracts or workers who don’t work every week of the year, will now need to do two things to ensure that they remain compliant with the law:

  1. Calculate holiday entitlement and pay based on the same criteria as full time workers (min of 5.6 weeks) regardless of how many hours they actually work.
  2. Arrange to have any written contracts with such workers amended to reflect this new method of calculating holiday pay.

Employers also need to be aware that Employment Tribunal claims can be claimed back retrospectively for underpayment of holiday pay and should consider the financial liability and likelihood of any potential claims that could occur and the impact of such claims.

Need help to understand how these changes will impact your business?

At First Call Financials we help small businesses ensure they are fully compliant with their payroll obligations.   If you would like more information about these changes and the impact that this judgment will have on how you calculate holiday pay for your casual workers, please get in touch.


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This post was written by Karen

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