Issues surrounding the provision of holiday pay and entitlement have once again hit the headlines as the government have launched a consultation in response the Supreme Court’s decision in Harpur Trust v Brazel.

The consultation, which runs until 9 March, 2023, will address the complexities around holiday pay and seek views on the proposal to introduce a fixed 52-week reference period for the purposes of calculating holiday entitlement for part-year and irregular hours workers.

Why is a consultation needed?

In July, the Supreme Court confirmed that all permanent part-year workers, including term-time and irregular hours workers, should receive 5.6 weeks’ leave paid at the rate of a week’s pay and that, under the current wording of the Working Time Regulations 1998, it is not possible to pro-rate that statutory leave entitlement on the basis that the worker does not work each week of the year.

This has resulted in some part-year workers being entitled to more holidays than part-time workers who work the same number of hours across the year. 

The government is now seeking to address this disparity by ensuring that a part-year worker’s holiday entitlement is directly proportionate to the number of hours they actually work. It is also looking to simplify the now-complex holiday pay and entitlement rules as part of its drive to boost economic growth by making it easier for employers to understand and comply with the law. 

How would holiday pay be calculated under the government’s proposal?

Essentially, the government proposes to introduce legislation which would enable employers, at the outset of each leave year, to calculate the annual statutory holiday entitlement in hours for the forthcoming leave year for part-year and irregular hours workers.

This would be done by looking back at the previous 52 weeks to calculate the total hours worked and multiplying this by 12.07%. Crucially, these 52 weeks would include non-working weeks. At present, non-working weeks must be disregarded, as to do otherwise would amount to a pro-ration, which Harpur Trust held was prohibited.

What could this mean for organisations?

This proposal would reverse the effects of the Supreme Court’s decision and make it far easier for organisations and workers alike to understand the amount of holiday entitlement due.

This fixed method of calculation, as opposed to the current rolling reference period applied at the point of each period of leave, is not perfect but would provide certainty as to the leave entitlement for any given year.

It is recognised that where there is not a pattern of work, there would need to be a method for converting an annual entitlement in hours to days so that both parties knew how much of the entitlement would be used up by each day taken off. The government’s proposal is that a flat average working day method is used whereby the reference period is used to work out the number of hours which comprises the average working day.

Again, this isn’t without its flaws, as it does mean that workers may be incentivised to take leave on days where they would otherwise have worked less than the flat average day. However, the alternative approach (of working out the average hours worked on each particular day of the week over the reference period, e.g. every Friday) would carry a high administrative burden for employers.     

How would holiday pay be calculated in the first year?

Finally, where a worker is in the first 12 months of employment, it’s proposed that employers would be permitted to calculate holiday entitlement at the end of each month, applying 12.07% to the number of hours worked in that preceding month.

This monthly accrual system would continue until 52 weeks of employment had been completed, at which point the 52-week reference period would apply. A similar proposal is made in respect of agency workers.

This endorsement of an accruals approach would mark a significant departure from Harpur Trust.

How soon could we see change?

It’s difficult to predict when we may see any change following the closure of the consultation in March. A lot rests on how motivated the government is to bring about that change and how much they want to garner support from organisations.

The proposal is founded upon the government’s intention to stimulate economic growth by simplifying complex employment law provisions, making the UK a more attractive place to do business. In the current challenging economic climate, that is likely to remain high on the political agenda for months to come.

It’s estimated that the proposed change would save organisations between £50 million and £250 million in the first year and up to £250 million annually thereafter, so there’s a real benefit to organisations.

Whilst a return to the trusted 12.07% pro-ration will likely be roundly welcomed by employers, it’s estimated to cost those workers affected around £149m in lost paid leave. The responses to the consultation may therefore have a significant bearing on what happens next.