By Michelle Quince, Senior Accountant at Hive Business

Sometimes you go to sleep one day and wake up the next and things are inexplicably different. One day it’s summer, the next day autumn suddenly appears. One day The Great British Bake Off is your favourite TV show, the next day it isn’t (Channel 4 still have a lot to answer for!). It’s like that with the law as well, everything will be carrying on as normal and then something puts a spanner in the works and we all have to go back to the drawing board.

A recent Court of Appeal decision has had that effect on the payroll department. A music teacher, who worked only term-time and was on a zero-hour contract, brought a case against her employer and, four years later, the case has been found in her favour.

In essence, the teacher was of the view that she had not been paid her full entitlement of holiday. Her employer had calculated her holiday based on the ACAS recommended method for casual workers whereby holiday allowance is calculated as a set percentage of hours worked, but there is an alternative method where the allowance is based on the 12-working week average. Let’s look at an example. If the music teacher worked for 20 hours per week for 39 weeks a year, her entitlement would be:

• Method 1 – 12.07% of hours worked = 95 hours;
• Method 2 – Based on 12-week average = 112 hours.

As you can see, the 12-week average produces a greater holiday allowance since the percentage method compares her working hours to that of a full-time employee. The judge reviewing the case noted there was nothing in the provisions (Working Time Regulations 1998) that required a different approach to be taken if a worker did not work a full year and hence upheld the appeal set by a previous Employment Appeal Tribunal … meaning the music teacher won!

ACAS have now revised their guidance and refer employers to the averaging method, which is as follows:

• Collate the hours worked per week for the last 12 weeks – you must ignore any weeks in which the employee did not work at all;
• Calculate the average weekly working hours (total the hours worked in the previous 12 weeks and divide by 12);
• Multiply the average weekly working hours by 5.6 (5.6 weeks is the statutory minimum holiday allowance = 20 days plus bank holidays);
• This will give the casual workers holiday entitlement for the year.

As you can see, it’s a little more labour intensive than the previous percentage method. That is probably why HMRC’s very handy holiday calculator is currently “down for maintenance”. Either HMRC is holding out to see if a further appeal is taken to the Supreme Court or they’re just trying to figure out how to easily put the new method into an online calculator!

The important thing to note is that this is the method for casual workers – those workers with no fixed hours, including those with zero-hour contracts. If an employee is part-time and has a contract stipulating a fixed number of hours or days, their holiday entitlement is 5.6 times their “normal” weekly working hours.

Unfortunately, the rule changes don’t stop there. From April 2020, “The Employment Rights (Employment Particulars And Paid Annual Leave) (Amendment) Regulations 2018” come into force and mean that average weekly hours for the holiday entitlement calculation will have to be based on the previous 52 weeks of work (still ignoring those weeks in which the employee did not work). The regulations provide extra guidance for employees who may not have worked for you for a full year and for those who may not have worked 52 weeks in the last two years. Therefore, the need to keep accurate and up-to-date records for casual workers will be all the more important going forward.

If we are your payroll provider and you have more questions, please get in touch.