Last year the Supreme Court considered how holiday pay should be calculated for those on a part-year contract. In this article, we consider the potential pensions implications of the case.
Very briefly, Harpur v Brazel concerned a music teacher (Mrs Brazel) who was employed on a permanent contract. However, she was only required to work during term time. During term time her hours would vary each week. Under the Working Time Regulations 1998 (WTR) every worker is entitled to 5.6 weeks paid holiday per year. Initially Mrs Brazel was paid 5.6 weeks holiday, which was split equally between the three school terms. Harpur (the employer) used the ‘calendar week method’ to calculate a week’s pay by taking Ms Brazel’s average pay during the previous 12 weeks worked (which at this time, was the reference period prescribed by the Employment Rights Act 1996). In 2011, Harpur changed its method of calculating Ms Brazel’s holiday pay and adopted the ‘percentage method’ instead. Ms Brazel’s holiday entitlement was thereafter calculated at 12.07% of the total hours worked in the previous twelve weeks. This calculation resulted in a lower holiday entitlement. Mrs Brazel brought a claim for unlawful deduction of wages, which ultimately reached the Supreme Court.
The Supreme Court decided that whilst workers were entitled to be paid for 5.6 weeks of holiday, the WTR required the calculation of a week’s pay for permanent workers with no normal working hours to be done using the calendar week method, taking the average week’s pay from the previous 52 weeks worked (as the reference period had since been changed from 12 weeks to 52), disregarding weeks not worked. The Court confirmed that the percentage method was not compliant with the WTR as there was no provision to allow holiday pay to be pro-rated for those with no normal working hours.
So how might this impact on pension provision?
Essentially, it may give rise to some affected workers receiving a higher salary going forward. There may also be back pay owing. This is likely to result in additional pension contributions falling due retrospectively and an increase pension contribution in future.
Defined contribution schemes
The position for defined contribution (or ‘money-purchase’) schemes is reasonably simple. If holiday pay is included within the definition of ‘pensionable pay’ in the scheme rules, pension contributions (from both employer and employee) will be due on any increase.
Be aware that there may also be a claim for lost investment gains.
The automatic enrolment earnings trigger for the current tax year 2022/23 is £10,000. There may be a small number of employees who, if determined to be eligible for an increase in holiday entitlement, are lifted over the auto-enrolment threshold. Where this is the case, those employees will need to be enrolled in a qualifying scheme and contributions paid (both from the employer and employee).
Final salary schemes
Final salary (or ‘defined benefit’) schemes, including in the public sector, the position is slightly more complex. Along with additional contributions potentially falling due, there may be added difficulty where calculations of what is pensionable pay are required. If back pay is pensionable, the may lead to complex administrative consequences with final salaries and career average earnings needing to be adjusted accordingly. Additionally, once the retrospective calculations have been completed, there may be implications in relation to funding, deficits and future contributions for employers.
What steps should you take now?
First, it is important to consider whether your scheme membership includes members who work only part of a year, such as those on a term-time or zero-hours contract, and who continue to be employed during the periods in which they are not working. Where this is the case, you should consider the following:
- Consider how this case affects your workers and decide what action you wish to take.
- If changes are made, are members’ salaries increased as a result?
- Budget for any required increase in pension contributions.
- Review the definition of pensionable salary in the scheme rules.
- Does this bring any employees within the eligibility criteria for auto-enrolment?
- Does this mean an increase in pension contributions is due?
- Correct member benefits as necessary – this may include retrospective, as well as prospective, rectification.
- Care needs to be given when communicating the impact of any changes to both members and employers.
It should be noted that the government are currently consulting on this issue, with responses due by 9 March 2023, so this advice may be subject to change. We are preparing to respond to the consultation. If you would like to share your opinions with us, please get in touch.
Our employment and pensions teams can support your organisation in providing advice and guidance to affected employees, either by way of answering specific queries or by helping draft more general guidance for dissemination.
For further information, please contact our Head of Pensions, Nigel Bolton.