Bulletins | May 1, 2018

Capping holiday pay at 12.07% breached a part-time worker’s rights

Employers who use the common “12.07% of annual earnings” method for calculating holiday pay for part-time workers will need to consider their potential financial exposure following a recent EAT decision.

The case confirmed that the correct way of calculating pay for employees with irregular working hours is the method set out in the Employment Rights Act 1996, whereby holiday pay is based on average remuneration over a 12 week reference period.

The employer had been capping the holiday pay of a zero-hours, term-time employee at 12.07% of her annual earnings. However, she challenged this, since by using the 12 week averaging method she would have been entitled to holiday pay of approximately 17% of her annual pay. The employer argued that this would be unfair to full-time workers.

The case held that there was no legal basis for deviating from the 12 week calculation method, or for capping part-timers’ pay to avoid treating them more favourably than full-time employees.

Action points: 

  • Employers using the 12.07% calculation method for staff who work variable hours and do not work the full year, such as term-time workers and seasonal workers, should audit their holiday pay practices as they are potentially exposed to claims for underpayment of holiday pay. Unlawful deduction claims for underpaid holiday pay can be brought up to three months after the last in the series of unlawful deductions and can only cover the last two years’ of deductions.
  • Because of the short three month limitation period, an employer may be able to “break the chain” by changing calculation methods now.
  • Holiday pay is increasingly becoming an issue on business sales and with TUPE transfers – transferees and buyers should ensure that full disclosure is made of previous practice and seek an indemnity to cover the risk of historic claims.

[1] Capita Customer Management Limited v Ali & another UKEAT/0106/17

[2] Brazel v Harpur Trust UKEAT/0102/17