The UK Supreme Court last week affirmed a Court of Appeal ruling that the amount of leave to which a part-year worker under a permanent contract is entitled is not required by EU law to be, and under domestic law is not, prorated to that of a full-time worker. The ruling affects holiday leave and pay calculations for contingent work arrangements, employment businesses and others that employ workers who work part of the year on permanent contracts.

This ruling raises an important issue about the statutory leave requirements for part-time workers who may also be described as part-year workers, namely those who work for varying hours during only certain weeks of the year but have a continuing contract throughout that year. These workers neither work the full number of hours worked by full-time workers nor the full number of weeks worked by part-time workers. Their work is irregular.

The Supreme Court said the issue in the case is whether their leave entitlement is calculated on the same principle, proportionally, as full-time employees (which would mean that the weeks that they do not work reduce their entitlement) or whether their leave must be calculated ignoring unworked weeks.

The latter would leave the workers with a leave entitlement that proportionally exceeds that of other employees. Nonetheless, the Court of Appeal held that the proper construction of the domestic law led to that result and that such a construction was consistent with the applicable EU law. The Supreme Court agreed.

This “part-year worker” arrangement has been a common model among umbrella companies and similar workers.

Law firm Osborne Clarke said the judgment will lead to major changes in some contingent workforce arrangements in the UK and some claims.

“This will affect not only traditional employers with relevant part-year workers but also a lot of umbrella companies, employer-of-record companies, some industrial staffing companies and perhaps some gig worker platforms where workers are engaged on an overarching employment basis and work only part of a year,” Osborne Clarke states.

In the case, the courts had rejected the employer’s percentage-based methods of calculating holiday pay. “The 12.07% calculation is very widely used in flexible-working situations including in rolled-up holiday-pay arrangements. Only arrangements where the worker was engaged on an overarching or ‘permanent’ contract, albeit with zero hours, are affected by this decision,” Osborne Clarke stated.

Osborne Clarke added that employers, including certain staffing companies, online staffing platforms and umbrella companies, will now need to revisit their contractual arrangements and holiday pay calculations for part-year workers, as well as understanding any existing liabilities under the Working Time Regulations and/or for unlawful deduction of wages.

Many will need to review the way part-year zero-hour contracts are structured, the law firm warned, adding that workers often like this sort of contract because it gives them the flexibility to work around their other personal commitments. However, it added that unless practices and contract structures are changed (as many have already been in anticipation of this case) the arrangements may become significantly more expensive for operators and users of those arrangements including in many zero-hour, agency worker and umbrella worker situations.

“Overall this represents another development that operators and users of umbrella companies and other flexible workforce models will need to stay on top of, alongside greater HMRC scrutiny of aggressive tax avoidance arrangements used by some, but not all, umbrella companies,” Osborne Clarke added.