Case Law Update – October 2019

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The Harpur Trust v Brazel [2019] EWCA Civ 1402 – How should holiday pay for ‘part-year’ permanent workers be calculated?

This important Court of Appeal decision challenges the traditional approach to calculating holiday pay for workers on ‘part-year’ permanent contracts.

The case involved a music teacher, engaged by the Harpur Trust on a permanent (year-round) contract to work term-times only. She was paid only for the work that she did during term-time (she did not work at all during school holidays). The question was, how should her holiday pay be calculated?

The Trust had calculated it in accordance with a method recommended (at the time) by ACAS in its guidance booklet ‘Holidays and Holiday Pay’ for calculating the pay of casual workers. Following this guidance, it calculated Ms Brazel’s earnings at the end of each term and paid her based on 12.07% of the figure (nb 12.07% is 5.6 divided by 46.4 (being the number of working weeks in a year) multiplied by 100).

Ms Brazel argued that this was incorrect. She argued that this produced a lower figure than the calculation method set out by the Working Time Regulations 1998 (WTR) and sections 221-224 of the Employment Rights Act 1996 (ERA) which requires a worker’s holiday pay to be calculated as a ‘week’s pay’ for each week of leave. For workers who do not have normal working hours, a week’s pay is deemed to be the worker’s average weekly pay in the 12 weeks before the first day of holiday excluding any weeks in which no remuneration was payable (note that this 12 week reference period is due to be increased to 52 weeks with effect from 6 April 2020).

Ms Brazel argued that there was nothing in the relevant provisions requiring a different approach (such as the 12.07% approach) where, as in her case, the worker does not work a full year. The Employment Tribunal disagreed but its decision was overturned by the Employment Appeal Tribunal so the Trust appealed to the Court of Appeal.

The Court of Appeal dismissed the Trust’s appeal. It held that the WTR made no provision for pro-rating holiday for permanent part-year workers. This was the case even though it produced the following two anomalies.

  • Using the 12-week reference period would result in Ms Brazel’s holiday entitlement being more than a full-time worker (in her case equivalent to 17.5% of her earnings).
  • A person who worked just one week a year and earned £1,000 in that week could, in theory, take their 5.6 weeks holiday entitlement immediately after their week of work with the holiday pay calculation being based on their earnings in that week (so £5,600). Admittedly, it is unlikely in practice that anyone would have a permanent contract to work just one week a year.

Despite these ramifications, the Court of Appeal held that the WTR make no provision for pro-rating but simply required the straightforward exercise of identifying a week’s pay in accordance with the provisions of sections 221-224 ERA and multiplying that figure by 5.6.

The Court commented, “It may at first sight seem surprising that the holiday pay to which part-year workers are entitled represents a higher proportion of their annual earnings than in the case of full-year workers, but I am not persuaded that it is unprincipled or obviously unfair.

It is important to appreciate that the workers in question are on permanent contracts. It does not seem to me unreasonable to treat that as a sufficient basis for fixing the quantum of holiday entitlement, irrespective of the number of hours, days or weeks that the worker may in fact have to perform under the contract: it is important not to lose sight of the fact that the actual days from which they will be relieved, and the quantum of their holiday pay, will reflect their actual working pattern.”

Walker Morris comment

The Court of Appeal has made it clear that workers on a part-year contract should not have their 5.6 weeks’ statutory holiday entitlement under the WTR pro-rated to reflect the fact that they do not work for the full year. Those employers who have been using 12.07% of earnings as a basis for the calculation of holiday pay for casual workers may wish to seek further advice. Types of employees affected and who might raise requests for back payment include visiting music teachers or sports coaches engaged to work only during term time.

In the meantime, note that the Government has removed references to the holiday pay calculator from its guidance on calculating holiday pay for workers without fixed hours or pay (the relevant page states that the holiday pay calculator has been removed “while the service is under review”).

If you would like further information about this case or holiday pay calculation generally, please contact David Smedley or Andrew Rayment.

Tillman v Egon Zehnder Ltd

The Supreme Court has provided guidance on when it is allowable to sever words from a restrictive covenant in circumstances where, if the words were to remain, the covenant would be void as an unreasonable restraint of trade.

This decision involved an employee, Ms Tillman, who was subject to a number of restrictive covenants in her employment contract which lasted for 6 months following the termination of her employment.  In particular, there was a ‘non-compete’ covenant stating that Ms Tillman could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company…….”.

Within one week of leaving her employment with Egon Zehnder, Ms Tillman indicated that she intended to start working for a competitor.  Egon Zehnder applied for an interim injunction seeking to prevent her from doing so.

Ms Tillman defended the proceedings and argued that the non-compete clause was an unreasonable restraint of trade and therefore was void.  She said that the words in the covenant, “or interested in any business”, prevented her from holding even a minor shareholding in a competitor.

The High Court awarded the injunction against Ms Tillman and she appealed. The Court of Appeal agreed that the words “or interested in” had the effect of unreasonably preventing Miss Tillman from holding a minor shareholding in a competitor.  It was irrelevant that Ms Tillman’s stated intention was to work for the competitor (not just take a minor shareholding in it) and that she was arguing the ‘shareholding’ point as a means to avoid being bound by the covenant. Having lost on this point, her ex-employer went on to argue, unsuccessfully, that the offending words (“interested in”) should be severed from the covenant.

On appeal, the Supreme Court agreed with the Court of Appeal that the words “or interested in” meant that the clause was an unreasonable restraint of trade. It then went on to look at whether the offending words could be severed from the covenant to leave the covenant standing.

It considered two previous Court of Appeal decisions on severance, one from 1920 (Attwood) and one from 2007 (Beckett Investment Management Group Ltd v Hall). In Beckett, the Court of Appeal had set out three criteria where (if all three criteria apply) severance may be permissible, as follows:

  • The unenforceable provision can be removed without the need to add or modify the wording that remains.
  • The remaining terms continue to be supported by adequate consideration.
  • The removal of the unenforceable provision does not so change the character of the contract that it becomes a different contract to the one the parties entered into.

The Supreme Court followed this ‘Beckett’ approach. It held that the words “or interested” (which had meant the covenant was an unreasonable restraint of trade) could be severed from the clause. This meant that the injunction originally granted by the High Court was restored although the 6-month restraint period had, by then, passed.

Walker Morris comment

When it comes to restrictive covenants, prevention is always better than cure. We often see employment contracts containing ‘blanket’ restrictive covenants that go further than necessary to protect the business legitimate interests and which would stand very little chance of being successfully enforced. The take-home point is that restrictive covenants need careful thought and drafting. Employers should consider where the risks lie in the event of certain employees leaving and tailor restrictive covenants accordingly. Then, if the covenants do need to be enforced, the employer will be in a good position to do so and the covenants will have far better deterrent-value.

Remember that restrictive covenants should be reviewed and updated in the case of promotion or where an employee is rising rapidly through the ranks. Covenants agreed when the employee was at a junior level may not provide adequate protection as the employee becomes more senior.

If you would like further information about this case or restrictive covenants generally, please contact David Smedley or Andrew Rayment.

Chief Constable of the Police Service of Northern Ireland v Agnew and Others – three-month holiday pay break rule challenged

A decision of the Northern Ireland Court of Appeal has challenged the way in which backdated pay claims are calculated.

The Northern Ireland Court of Appeal (NICA) has handed down a judgment that challenges the rule (set down by the Employment Appeal Tribunal (EAT) in Bear Scotland v Fulton in 2014) that there will be a break in the chain of any series of deductions where a period of more than three months has elapsed between the deductions.

The case involved claims made by over 3,600 police officers and civilian employees against the Police Service of Northern Ireland for unlawful deductions for underpayment of holiday pay. The employees claimed that their holiday pay should have been calculated by reference to normal pay including overtime.

The NICA took the view that the Employment Appeal Tribunal in Bear Scotland v Fulton had been mistaken that a gap of three or more months between deductions would break the series of deductions. It held that there was nothing in the relevant legislation that placed a limit on the gaps between deductions making up a series.

The NICA held:

  • That a gap of three or more months between deductions will not break the series of deductions. A claimant can claim for unlawful deductions that arose
  • before the three-month gap and form part of the series of deductions.
  • If all deductions arose out of the fact that holiday pay was paid as basic pay and did not include overtime/allowances, they are likely to form part of the same series of deductions.
  • A series of deductions will not be interrupted by a lawful payment.
  • When annual leave is taken, employees do not use up their Working Time Directive (WTD) leave first. There is no requirement for leave from different sources to be taken in a particular order. The NICA disagreed with the EAT in Bear Scotland, which had held that WTD leave was used first. Days of annual leave formed part of a composite whole and it was not possible to allocate days to particular types of leave.
  • A daily rate for overtime should be calculated by dividing the number of working days in the four-week leave period (20) by the number of working days in the 12-month reference period, then multiplying by annual pay.
  • Normal pay should be calculated based on average pay over a rolling 12-month reference period immediately preceding the period of leave, although this will be fact-sensitive in each case.

This decision is not directly binding on the English, Welsh or Scottish courts but it could be persuasive. This is because the wording in the Employment Rights (Northern Ireland) Order 1996 (ERO) relating to a series of deductions is the same as in the Employment Rights Act 1996.

Walker Morris comment

We expect to see unions referring to this decision to bring pressure in respect of holiday pay claims. However, even if the judgment were to be followed by the courts in England, there is still legislation in place imposing a two-year cap on unlawful deductions claims.

If the NICA decision is appealed, the Supreme Court’s decision would be binding on the whole of the UK.

If you would like further information about this case or how it might affect your business, please contact David Smedley or Andrew Rayment.