Harpur Trust v Brazel: Act now to make sure the impact on your financial statements is understood

Background to the case

The background to this is the Harpur Trust vs Brazel case where a music teacher was employed on a zero-hour contract with variable pay from week to week. Her argument was that the academy trust’s approach of paying 12.07%* of her salary in each period as holiday entitlement (‘the percentage method’) was not in line with employment law.  

*This was on the basis that 5.6 weeks is equivalent to 12.07% of hours worked over a year (5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks – 5.6 weeks) multiplied by 100 = 12.07%) (the “12.07% Method”). 

Ultimately this case reached the Supreme Court and was upheld in 2022.  The judgement stated that the percentage method should no longer be used and that under the Working Time Regulations 1998 (“WTR”), workers are entitled to a minimum of 5.6 weeks of paid holiday per year**. This is irrespective of the number of days, weeks or months worked.   

**When calculating pay for this leave, employers should take an average of their weekly earnings over the previous 52 working weeks.  

The above impacts part-year workers rather than part-time workers. 

Example: if you pro-rated leave for an employee who was on a term-time contract of 39 weeks, their entitlement might have been 4.7 weeks (39 x 12.07%), rather than 5.6. As a result of the Harpur vs Brazel case, it would now be 5.6 weeks. 

Impact at 31 August 2022

For the year ended 31 August 2022, the sector considered the impact on their part time workers and, where material, provisions were made at that time for liabilities. If an individual brings an employment tribunal case the claim is limited to two years, but unions typically seek to claim for five years of back pay, so these provisions have a significant impact.  

Our advice at this time was that all academy trusts should determine their risk exposure, plan a resolution and take steps to minimise future risk exposure by amending contracts to ensure that holiday pay is compliant with legislation.

Developments in 2023  

The consequence of this case is that, pro rata, staff on zero hours or variable contracts are receiving higher holiday pay than full time staff, especially if they only work for a few weeks a year (for example examination invigilators). At 31 August 2022, the consensus across the sector was to identify affected staff and provide for back holiday pay where necessary, typically covering a two-year retrospective period. Also, in the majority of cases, employers changed contracts to regularise the position and avoid this situation recurring in future.  

In January 2023 the government opened a consultation on this issue with a view to assessing the impact of the judgement. The result of this was released on 8 November 2023. The majority of responses were that the fairest approach would be an accrual method for calculating holiday pay for workers with irregular hours, where holiday pay would be based on 12.07% of hours worked in the previous month. This would be a return to the system in place before the Harpur vs Brazel case.  

The government’s response is that they intend to introduce legislation to calculate holiday pay entitlement at 12.07% of hours worked in a pay period for irregular hour workers and part time workers.  There is no change proposed for full time staff who will accrue 1/12 of their statutory entitlement each month. They also intend to define irregular hour workers and part year workers more clearly in the legislation to provide clarity on the staff affected following the Harpur vs Brazel case.  

There is also a proposal to give irregular hour workers an option to receive ‘rolled-up holiday pay’ where the additional 12.07% would be paid in each pay period rather than employees receiving payment for annual leave days. This will simplify the administrative process for employers if employees choose this option although concerns were raised at the consultation that this might disincentivise workers from taking leave. The government’s view is that existing safeguards should be sufficient to prevent this.   

At present there is no timetable for the updated legislation or any transitional provisions, so these changes are not expected to be enacted before the financial statements are finalised for the year ended 31 August 2023 across the education sector.

Impact on year ended 31 August 2023 

Given the uncertainty around timing of the revised legislation, our view is that these developments do not affect the provisions in the financial statements, so these should continue to be prepared on the basis that the Harpur vs Brazel outcome still applies; this is set out below.  

The accounting treatment for the provision for potential liabilities is as set out in FRS 102 (Section 21) and the Academies Accounts Direction follows this approach.  

The conditions for recognising a provision for potential liabilities are as follows:  

• the entity has an obligation at the reporting date as a result of a past event;   
• it is probable (i.e. more likely than not) that the entity will be required to transfer economic benefits in settlement; and  
• the amount of the obligation can be estimated reliably.  

There is also a requirement for entities to review provisions at each financial year end to reflect the current best estimate of the liability.   

The key condition for the re-assessment at 31 August 2023 is the probability of a claim being made by either an individual or a union under Working Time Legislation and this is where individual trusts will need to exercise judgement. Some factors to consider are as follows:  

• the number of years of provision which were made in 2022; if provisions were made covering 5 years of back holiday pay (so at 31 August 2022 this would cover the period from 1 September 2017 onwards) then at 31 August 2023 the earliest year could potentially be released; 
• whether the affected staff are union members; if not then the time period for making a claim for unlawful deduction of pay is 3 months from the end of the holiday year affected (although an employment tribunal may allow a claim up for up to two years); and   
• the level of engagement with staff, and where appropriate, unions. If engagement is low and it is considered unlikely that future claims will be brought then there may be an argument for releasing a proportion of the earlier years’ provisions.  

There is also the matter of staff relations to consider as the costs of the trust being taken to a tribunal may exceed the cost of the back pay as well as damaging staff productivity and engagement. 

Until the government consultation was announced, the advice across the sector was for employers to make the appropriate back-dated payments and to amend contracts to regularise the position.  Now that the proposed legislative changes are known there may be an argument for pausing this process. Once the revised legislation is in place provisions can be reviewed and where appropriate released in future years. 

Our recommendations   

The key decision for the sector is whether to make the backdated payments to all staff affected or to wait for individuals or unions to make claims; this is not affected by the changes announced in November 2023 given the new legislation is not yet in effect.  

Given these proposed changes, if the Academy Trust decides to await any claims rather than making back-dated payments, the Trust will need to undertake a risk assessment considering the above factors and any other considerations for the individual trust and assess the level of any provision that is required. A possible approach would be to retain the full provision for the year ended 31 August 2022, a percentage of the provision in relation to 31 August 2021 and consider releasing any provisions relating to earlier years but this will need to be a judgement for the trust.  

We recommend that the basis for any release of provisions should be clearly documented including the underlying calculations and any assumptions made.  

We will continue to monitor the position and will keep the Academy Trust updated on developments over the coming year; it is hoped that the legislative position will be clarified by 31 August 2024. 

Further advice and support

If you think the outcomes of this case will impact your financial statements and would like to discuss it further with us, please complete the form below and one of our experts will be in touch.