What are the new rules on calculating holiday pay for seasonal workers?

By Donna Obstfeld on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

A recent court judgement, the Harpur Trust vs Brazel case, brought holiday pay for seasonal and part-year workers into focus.

We’ll take you through the findings of the case and what that means for you as an employer.

What happened in the Harpur Trust vs Brazel case?

Ms Brazel is a music teacher who was on a permanent zero-hour contract and worked depending on how many individual music lessons were scheduled in any given week. She argued that she was worse off on her new holiday pay rate than she would have been under The Working Time Regulations. The school said that as she only worked part of the year, pay was in proportion to the number of weeks she actually worked, based on the 12.07 per cent rule.

What is the 12.07 per cent rule?

Known as the percentage method, the 12.07 per cent rule is calculated by taking a standard working year of 46.4 weeks, with 5.6 weeks being 12.07 per cent of 46.4 weeks. However, this can lead to workers getting paid less than they’re entitled to.

A key issue is that under the Regulations, holiday is accrued during periods of non-work as well whereas the 12.07 per cent rule only factors in periods of work.

In the Court of Appeal judgment, Lord Justice Underhill held that the Working Time Regulations did not provide for the kind of pro-rating which underlies the application of the 12.07 per cent formula in the case of a part-year worker.

What does it mean for small business owners?

There’s been no change in legislation, but the judgement has opened up the possibility of more cases like this, so it’ll be wise to review how you pay part-year workers.

Basically, this ruling affects any employer who has employees who work irregular hours during certain times of the year but who don’t have a regular contract throughout the year, such as workers in the education system and seasonal staff.

In line with the Working Time Regulations, all workers should get the full statutory minimum 5.6 weeks paid holiday per year while the pay for their holiday pay must be based on the calendar week method of averaging a week’s working hours (averaged over a 52-week period and using weeks where they worked).

That said, you can still determine when they take holiday and use the worker’s hourly rate when calculating the rate of pay when paying for holiday.

For part-year and zero-hours workers, you could offer contracts for less than a year and issuing a p45 at the end of that period. The downside of this is that there is case law which shows that in a school setting the terms can be joined together for continuous service.

In addition, employees who have a series of contracts back-to-back over a two-year period can be treated as a permanent employee and are entitled to a permanent contract of employment. So unless you take significant breaks between contracts, the employee will be entitled to permanent status and therefore 5.6 weeks of holiday, even on a series of fixed term contracts.

If you are hiring seasonal staff for the summer or Christmas, you will need to offer fixed term contracts and issue P45s after the contract expires, rather than holding your seasonal workers as bank staff until such time as they resign or you terminate them. This means that you will have additional recruitment, onboarding and training costs each ‘season’.

There is also a large administration cost associated with calculating annual leave for these employees. Every part-year employee will need to have their holiday pay calculated based on the number of hours worked in the previous 52 weeks before they take leave. If you only have a couple of part-year employees, this may not be such a major task. However, if you employ a lot of part-year employees, this could become a significant monthly job for your finance department or payroll provider.

Another element of the financial risk is the actual cost of paying the increased holiday pay entitlements. An employee who is on a permanent contract and works full-time for 12 weeks every summer would have been entitled to 6.5 days of paid annual leave. Now they are entitled to 28 days of paid annual leave.

The final financial risk is the cost of an employment tribunal. If an employee chooses to take you to an employment tribunal for unpaid holiday pay, unless you elect to settle out of court, you are going to need to pay legal costs and probably their costs as well, as well as the unpaid holiday pay and perhaps any fines applied.

It also makes sense to pay attention to admin tasks such as updating employment contracts and employee handbooks as well as reprogramming HR and time attendance software

You may also get requests for backpay. James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, has used the judgement to create an example calculation. A part-time sports coach who worked just one week, earning £1000, could be entitled to £5,600 of holiday pay. “Whilst this example is contrived, and extreme, it underlies the particularities now facing employers, and further underlines the risks of zero-hours contracts,” he said.

>See also: Zero hours contracts advantages and disadvantages

What about umbrella companies?

“This has particular and challenging ramifications for umbrella companies,” said Poyser. “The umbrella industry will now be facing multi-million-pound claims from workers for underpaid holiday pay. Umbrella companies have no recourse to reclaim this compensation from end hirers (the companies the workers performed the work for), meaning they will need to pay compensation from their own profits.

“Given this unexpected compensation claim and the wafer-thin margins umbrella companies operate on (no thanks to the aggressive kickbacks that exist in this market), I believe this year we will see more umbrella companies enter administration. The situation may well be exacerbated by no-win-no-fee practitioners with aggressive marketing campaigns.”

He added that, going forward, umbrella companies must manage the complexities of holiday pay along with the commercial risk surrounding this. Increased risk in the umbrella industry predicates unethical practices as umbrella companies turns to skims and scams (at the workers expense) to maintain their profitability, he added.

Employment tax specialist, Rebecca Seeley Harris, also said: “Off-payroll rules have exacerbated this situation – employers are employing people as permanent workers but putting them on zero contract/casual hours to compensate for the tax risks. Too many people who want to make a fair wage, on flexible terms, are exposed because of out of touch tax law, and too many employers are getting it wrong. This outcome is a massive deal for employment rights in this country. We need to take heed and overhaul regulation, and it must be done quickly.”

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