Calculating holiday pay has often been one of the most confusing elements of running payroll, especially within organisations where a large proportion of the workforce is made up of zero-hours and part-time staff. In addition to a new ruling, brought about by a successful appeal against an Employment Tribunal hearing, means payroll professionals may have to amend their calculations moving forward to ensure they remain compliant. 

In this article, we’ll take a look at the case in question, what the ruling means for calculating holiday pay in the future, and what actions payroll professionals need to take to keep compliant. 

The case

The case was brought forward by Mrs Brazel, a music teacher who worked within a permanent contract on a zero-hours basis at a school. As she did not work a full working week or during school holidays, her holiday pay was calculated based on 12.07% of her earnings from the school term that had just finished, and paid as a lump sum. 

That 12.07% figure has been standard practice for organisations in calculating how much to pay workers who aren’t full-time employees to cover their holiday entitlement. It’s based on The Working Time Regulations 1998 act, which states workers are entitled to a minimum of 5.6 weeks paid annual leave. Whilst this is easy enough to calculate for full-time staff, for part-time and zero-hours workers it can be harder to work out, so employers typically settled holiday entitlement at that 12.07% rate against total hours worked. 

However, Mrs Brazel argued that the calculation should instead be calculated in accordance with the Employment Rights Act 1996, which states that average earnings over the preceding 12 weeks should instead be used. If it had been, Brazel’s holiday payment would have been 17.5% of her earnings for the term. 

The ruling

The appeal was initially rejected at an Employment Tribunal, but after taking the case to an Employment Appeal Tribunal, Mrs Brazel won. The school challenged the decision up through the Court of Appeal and finally the Supreme Court, but both agreed with the Employment Appeal Tribunal’s ruling. 

The Supreme Court also noted how the Working Time Regulations clearly point to the Employment Rights Act when it comes to calculating holiday pay, meaning the 12.07% figure was incorrect. 

This marks a key shift in the understanding of employment law. The Working Time Directive sets out how part-time workers can’t be treated less fairly than full-time employees – but it doesn’t state that part-time workers can’t get a better deal than full-time staff. 

Read more: Does My Small Business Really Need Payroll Software?

Calculating holiday pay based on the ‘calendar week method’ as set in the court’s ruling means that part-timers may get a better holiday pay deal than regular employees, but that isn’t a reason to not use the 17.5% calculation. 

In short, calculating holiday pay based on average earnings from the preceding 12 weeks is the correct implementation of the Working Time Regulations, and is what all organisations should be following.

What organisations need to do now

As this case went to the Supreme Court, it’s important for organisations to understand that it now sets the new precedent for how holiday pay should be calculated for employees who work irregular shift patterns and whose pay varies according to hours worked.

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It’s also important that internal payroll teams understand the shift in precedent and update calculation procedures accordingly. This will include updating payroll software so that holiday pay entitlement calculations are based on 17.5% of the average pay over the preceding 12-week period, rather than 12.07% for these workers.

Get expert payroll support

Whenever legislation changes or a new court ruling sets a precedent for how organisations need to remunerate employees, payroll departments need to ensure their calculations are correct… and their systems have adopted those calculations too. 

At Phase 3, we help payroll teams to ensure compliance with payroll law and that their software is up to scratch with our bite-sized consultancy services, where we can offer as little or as much support as you need. 

Now isa great time to assess your current payroll and wider finance and HR systems to ensure best-practices are being followed and the latest legislation has been taken into account, from holiday pay to pensions, data protection and beyond. 

With our system review and health check service, our specialist teams can help you get the most out of your software and ensure it continues to meet your requirements – as well as addressing any functionality or legislative gaps. 

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