A recent Supreme Court Judgment has answered the long-awaited question about how the holiday pay for part-year workers should be calculated.
A ‘part-year worker' is someone who is permanently employed, but they only work for certain periods throughout the year, for example, term time only workers.
Employees in the UK are legally entitled to receive 5.6 weeks of paid annual leave under The Working Time Regulations 1998. Before the Supreme Court clarified how annual leave should be calculated for part-year workers, many organisations relied on the (now re-written) Acas guidance and used the recommended ‘percentage method'. The percentage method is where an employer takes into account the fact that 5.6 weeks in each year will not be worked, leaving 46.4 weeks as working weeks; dividing 5.6 weeks holiday allowance by 46.4 working weeks gives 12.07%. Many employers therefore calculated part-year workers holiday pay as 12.07% of their hours worked.
The Supreme Court disagreed with method of calculation, holding that this conflicts with the statutory method set out in the Working Time Regulations; and in doing so has provided useful clarification on how to calculate holiday pay for part-year workers.
The correct way to calculate holiday entitlement for part-year workers is in accordance with section 224 of the Employment Rights Act 1996, where the average remuneration under the calendar week approach must now be calculated over the previous 52 weeks, rather than 12 weeks. Under the old regulation, the average remuneration for part-year workers was calculated by looking at the previous 12 weeks worked. This was problematic for workers whose hours fluctuated throughout the year because it didn't provide an accurate picture of their average remuneration. Thus, this part of the calculation was amended to take into account earnings across the entire year.
This Judgment could potentially encourage workers to investigate whether they are being paid correctly under the new rules. This might cause an increase in underpayment claims which could lead to a significant financial burden for organisations. Employers who have used the percentage method rather than calendar week method should review the contracts of employment of their workers, conduct an audit of their holiday payment arrangements, and make any necessary adjustments. This process will also assist in determining their exposure to claims for holiday back pay.
However, both employers and employees should be mindful that The Deduction from Wages (Limitation) Regulations 2014 imposes a 2-year backstop on all claims.
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