HOLIDAYS - 25.11.2021

Holiday pay on termination of employment

Working time

Under the Working Time Regulations 1998(WTR) those who work a five-day week are entitled to 5.6 weeks’, i.e. 28 days, paid holiday each holiday year. In the first year of employment this statutory entitlement is calculated on a pro rata basis.

Thus, a new hire will only accrue their full 5.6 weeks’ entitlement if they commenced employment at the start of your holiday year.

Final entitlement

Many employees incorrectly assume that they are automatically entitled to receive a full 5.6 weeks’ statutory minimum holiday in their final year of employment. In reality, their statutory minimum paid holiday entitlement is based on how much of your holiday leave year has already expired.

So, if an employee leaves exactly halfway through your holiday leave year, they will be entitled to 14 days’ statutory paid holiday, i.e. half their 28-day entitlement.

Payment in lieu

When an employee leaves your employment and they have accrued holiday which can’t be taken before their termination date, they are entitled to be paid in lieu of that accrued holiday. This applies regardless of whether the termination of their employment is due to the employee’s resignation or a dismissal.

Unless there is a relevant agreement stating otherwise, which may be a term in the employment contract, a statutory formula is used to calculate the payment in lieu which must be made.

The formula

This formula is: (A x B) - C. According to the WTR : A is the minimum period of statutory minimum leave to which the employee is ordinarily entitled, e.g. 28 days; B is the proportion of the holiday year which has expired before the termination date, e.g. 50%; and C is the amount of holiday that’s already been taken by the employee in the final year of employment.

Hopefully, the answer will be zero - meaning no pay in lieu will be due - but if there are days accrued but untaken the employee must be paid in lieu for each one.

Tip. Any day’s pay for these purposes is based on working days not calendar days, so each day of accrued but untaken day of holiday will be worth 1/260th of the employee’s salary. We’ve created some worked examples (see The next step ).

Excess holiday taken

Sometimes an employee will have taken more holiday in their final year than they’ve actually accrued at their termination date.

Tip. In these situations, you can only deduct an amount equal to the excess holiday that’s been taken from their final salary payment if there is a relevant agreement which provides for such a deduction to be made. This could be a holiday pay on termination clause in their employment contract (see The next step ).

For some worked examples and a holiday pay on termination clause, visit https://www.tips-and-advice.co.uk , Download Zone, year 23, issue 21.