Accrued Holiday on Termination of Employment

An employment tribunal has held that payments in lieu of untaken statutory holiday on termination of employment must be calculated to reflect normal pay.

The Working Time Regulations 1998 (“the Regulations”) entitle an employee to pay in lieu of unused statutory holiday calculated in accordance with either (i) a “relevant agreement” (i.e. a written employment contract, a collective agreement or a workforce agreement) or, where there is no such agreement, (ii) the same statutory formula which applies during the employment, which requires that workers be paid at the rate of a week's pay for each week's leave. (See my blog of 29 July regarding what will constitute “a week’s pay” in the context of holiday pay.)

The Regulations do not prescribe how a payment in lieu of unused holiday is to be calculated under a relevant agreement. Some agreements have stipulated that no holiday pay will be paid at all – either in all cases, or in specified circumstances, such as where the employee has committed gross misconduct. However, it has long been established that such provisions, so far as they relate to accrued statutory holiday, will be void.

In a recent case, an employment judge considered whether a contractual term providing for a nominal payment of £1 in lieu of untaken holiday complied with the Regulations.

When the employment terminated, the employee had three days' accrued but untaken holiday. If this holiday had been taken during her employment, she would have been paid £176 net.

The employment judge’s view was that the Regulations must be read in the light of the Working Time Directive (“the Directive”), and he relied on decisions of the European Court concerning the Directive which provided that where a worker "has not been able, for reasons beyond his control, to exercise his right to paid annual leave before termination of the employment relationship, the allowance in lieu to which he is entitled must be calculated so that the worker is put in a position comparable to that he would have been in had he exercised that right during his employment relationship".

Based on this, the decision was that pay in lieu of untaken holiday under the Directive had to be calculated to reflect normal pay. However, the authorities relied on by the employment judge concerned the situation where workers were unable to take holiday during their employment for reasons beyond their control (in that case due to long-term sickness). It is arguable that this reasoning does not apply where it has been open to employees to take holiday (free of sickness) during their employment.

This is a first instance decision and is, therefore, not binding on other courts and tribunals. However, unless and until the higher courts decide otherwise, employers who are parties to relevant agreements which purport to allow otherwise should consider paying employees the same rate for untaken statutory holiday on termination of employment that they would have been paid if the holiday was taken during employment – at least in the event of a challenge by the employee. Where employers do make such payments, however, it would be consistent with principles applied in other cases that any statutory obligation to do so will apply only to the first 4 weeks of holiday entitlement in any year (the minimum entitlement under the Directive) and not the additional 1.6 weeks’ holiday provided for under the Regulations.

To emphasise, there is nothing to stop employers providing in employment contracts that there will be a reduced payment, or indeed no payment at all, upon the termination of the employment in respect of any holiday accrued in excess of the relevant minimum statutory entitlement.

For advice relating to the above issues, please contact me (T: 01952 211010; E: john.merry@lblaw.co.uk) or Will Morse (T: 01432 377152; E: will.morse@lblaw.co.uk