Three relatively recent Supreme Court decisions have answered important questions about statutory paid holiday entitlement, starting with the fundamental question of who is entitled to it in the first place. Decisions on how holiday pay should be calculated, and the time limit for bringing underpayment claims have followed. These rulings followed earlier decisions about the components of holiday pay, notably confirming that regularly worked overtime needs to be included in the calculation.
Important though these decisions are, they don’t necessarily mean the law on holiday pay has settled down. The Government is consulting on further changes, some of which take advantage of its post-Brexit freedom to modify EU-derived law.
This article focuses on the rights to holiday pay under the Working Time Regulations. It does not address contractual holiday entitlement in excess of the 5.6 weeks’ leave guaranteed by the Regulations. For this excess leave, employers are free (at least in theory) to define the terms of entitlement in the contract of employment.
Who is entitled to paid holiday?
Most disputes over employment status in recent years have been triggered by questions about holiday pay entitlement. The most famous of all these cases involved Uber drivers and was decided by the Supreme Court in 2021.
In order to qualify for paid holiday pay – a right that ultimately derives from the EU Working Time Directive – claimants must satisfy the definition of “worker” in the Working Time Regulations. That covers not only employees, but other individuals who are engaged under a contract to “do or perform personally any work or services”. However, there is an exception if the other party to the contract is a client or customer of a business carried on by the claimant.
Uber argued at the employment tribunal and through successive appeals that its drivers were self-employed people running their own businesses, and so were outside the scope of the Working Time Regulations. The appeal courts and ultimately the Supreme Court disagreed. When deciding cases involving statutory employment rights, it said that employment tribunals need to start by looking at the underling purpose of the relevant legislation. In this case the legislation was passed to protect the health and safety of economically vulnerable individuals, by ensuring a minimum paid holiday entitlement. Despite what the extensive documentation prepared by Uber said, the Supreme Court was not persuaded that the drivers were genuinely self-employed.
While individual circumstances are tremendously variable, as a general rule this decision means that individuals are now much more likely to qualify for worker status.
How should holiday pay be calculated?
The following year the Supreme Court had to decide another issue – how should holiday pay be calculated where a worker was not doing predictable hours? This case involved an hourly paid music teacher, Ms Brazel.
Ms Brazel had an annual contract, but worked term-times only. Because she was hourly paid, rather than receiving a monthly salary, her pay was concentrated during term time and she received nothing during the school holidays.
In this situation, the Working Time Regulations state that each week of holiday pay should be calculated by taking the worker’s average weekly pay over a defined reference period. At the date of Ms Brazel’s claim this was 12 weeks, but it has since been increased to 52 weeks. However, her employers preferred to calculate her pay in a simpler (and, as it turned out, cheaper) way, by uplifting her hourly pay by 12.08%. That was on the basis total paid holiday entitlement under the Working Time Regulations equates to that percentage of a full working year.
The problem was that Ms Brazel didn’t work throughout the year. So applying this rule of thumb calculation meant she received less holiday pay than she would have done if a reference period been used. Unsurprisingly, the Supreme Court decided that her employers should have followed the calculation method set out in the Regulations. It was not to be diverted by the anomalies that could arise when applying this approach in more extreme cases – for example an exam invigilator on an annual retainer who worked only for a handful of weeks each year.
Many employers have decided to review their arrangements for paying holiday pay to atypical workers as a result of this decision. In some cases this has led to new contractual arrangements being negotiated with these workers.
How far back can workers claim?
The final decision in this series of Supreme Court rulings is about the time limit for bringing claims. It involved police officers in Northern Ireland, and so there were some issues that were specific to that jurisdiction. The key issue for the whole of the UK was how the legislation that allows workers to bring claims for underpaid holiday pay based on “series of deductions” should be interpreted. Under that rule, rather than having to bring a separate claim within three months of each underpayment, a worker can link a sequence of underpayments together and bring a single claim within three months of the last underpayment in the series.
Since 2015, the meaning of a “series” of unlawful deductions has been uncertain. That was due to a ruling from the Employment Appeal Tribunal which said that a series would be “broken” by a gap of three months or more between successive underpayments. That decision was queried in a number of later cases, but we had to wait until this Supreme Court decision for it to be overruled.
The law has now reverted to what it was before the EAT’s 2015 decision – ie, whether a sequence of underpayments form a series is a question of fact for the employment tribunal to decide. In this case the tribunal had been right to decide that all the underpayments were part of the same series, since they all derived from a mistaken policy of excluding regularly worked overtime from the calculation of paid holiday entitlement.
In Great Britain – though not yet in Northern Ireland – legislation has been introduced which limits the recovery of underpaid holiday pay (and other wages) to the two year period prior to lodging the claim. Nonetheless, this latest ruling opens the way for significant claims for back pay where a worker has not been paid correctly. In addition, this limitation doesn’t apply where a worker has been mis-categorised as self-employed and has not been paid holiday pay at all.
What changes are under way?
Since Brexit, it has been possible for the UK to diverge (at least in matters of detail) from the standards laid down in the Working Time Directive. That has led the Government to propose several changes to the current working time regime. These include:
- Creating a standard holiday entitlement reference period for some atypical workers, so that holiday entitlement accrues proportionately to hours worked
- Allowing a percentage method to be used for the calculation of holiday pay for those atypical workers
- Allowing “rolled up” holiday pay, subject to certain conditions (currently this is not permitted, though in practice there are limited sanctions for non-compliance)
- Relaxing some record keeping requirements
At the time of writing we don’t know if and when these proposed changes will be introduced.
More information about the Supreme Court decisions featured in this article can be found in these blog postings:
Supreme Court upholds Uber drivers’ claim for worker status - Mills & Reeve (mills-reeve.com) (Uber 2021)
Leave entitlement of part-year workers should not be reduced for unworked weeks - Mills & Reeve (mills-reeve.com) (Brazel 2022)
Clarity at last on calculation of historic holiday pay claims - Mills & Reeve (mills-reeve.com) (Police Constable of Northern Ireland 2023)
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