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In light of the recent Supreme Court judgment in Harpur Trust v Brazel [2022] UKSC 21, the government has initiated a consultation regarding calculating holiday entitlement for part-year and/or irregular-hours workers. This development is particularly relevant for employment tax advisers and payroll providers.
Historically, the 12.07% formula has been a widely accepted method for calculating holiday entitlement for employees without standard working hours—this “rule of thumb” calculated holiday entitlement as 12.07% multiplied by the hours worked. However, the UK Supreme Court has recently ruled in Harpur Trust v Brazel that this method needs to be corrected for part-year workers on permanent contracts.
In the Harpur Trust v Brazel case, the 12.07% method prorated Mrs Brazel’s holiday entitlement based on her part-time (zero hours) and part-year (term time) work. This resulted in lower holiday pay than the alternative approach, which considered her average earnings but not her part-year work status. The Court declared that the 12.07% method was incorrect and that Mrs Brazel was entitled to the full statutory minimum of 5.6 weeks (28 days) of paid holiday entitlement per year, based on her average earnings. Consequently, part-year workers are now entitled to a larger holiday entitlement than part-time workers who work the same number of hours throughout the year.
For example, an exam invigilator working one week per year and earning £100 would be entitled to 5.6 weeks of holiday, amounting to £560, if they remain employed for the rest of the year.
The government has proposed introducing a holiday entitlement reference period for part-year and irregular-hours workers in response to the judgment. This would ensure that their holiday entitlement is directly proportional to their working hours, addressing the disparity between part-year and part-time workers caused by the Brazel case. Additionally, this proposal would effectively formalize the 12.07% method for irregular-hours workers, which many employers already use, and workers understand well.
Tax Accountant primarily focuses on agency workers employed through umbrella companies, often working irregular hours. Our analysis indicates that the Brazel judgment should only impact umbrella workers in cases where they experience unpredictable periods of non-work or paid leave while remaining engaged in their employment. Most umbrella workers are not truly part-year workers but full-year workers with variable weekly hours. Nevertheless, we have welcomed the proposals as an opportunity to bring clarity, certainty, and consistency to this complex and technical area.
Our Tax Advisors have emphasized the benefits of improved clarity on holiday entitlement for workers and umbrella companies, including better awareness of entitlements and avoidance of accidental non-compliance. Increased holiday pay, taxable as normal income, would also contribute to higher Exchequer receipts. Accordingly, we have urged the government to clarify its stance on rolled-up holiday pay and advance proposals for state enforcement of holiday pay, beginning with a consultation to identify the most suitable organization for enforcement.
Considering that the proposal for a single enforcement body to protect workers’ rights has been put on hold, we speculate whether HMRC may assume this role. We also recommend improved guidance for employers regarding holiday pay, including tailored guidance for the umbrella sector on communicating about holiday entitlement.
Although the consultation concluded on 9 March, a swift response and subsequent steps are anticipated. Until the proposals are enacted into law, holiday entitlement for part-year workers should be calculated following the principles established by the Court in Brazel. This landmark case has the potential to significantly influence holiday entitlement calculations for part-year and irregular-hours workers, employment tax advisers, and payroll providers. As a result, it is crucial for all parties involved to stay informed on the evolving legal landscape and adjust their practices accordingly to ensure compliance and fair treatment of workers. If you need help with tax planning and compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.