Holiday Pay & Entitlement on Termination

Holiday Pay

The right to receive payment in respect of accrued untaken holiday only applies upon an employee’s termination of employment, however, arising.

Recently, we have received a number of queries regarding holiday pay and entitlement upon termination of employment.

Holiday Entitlement

When an employee’s employment terminates, they are entitled to receive a payment for their accrued untaken holiday up to the date of termination.

In some instances, the employee may have taken more holiday than they were entitled to, and the employer can reclaim the overpayment if there is a clause within the contract of employment allowing them to reclaim any overpayment of wages.

Many employers have clauses within their contract of employment which state that any holiday which has not been taken by the end of the holiday year will be lost and cannot be carried over into the next holiday year, without consent. There are exceptions to this such as if you have taken some form or statutory leave or been on sick leave, and in these instances, holiday can be carried over.

The principle of ‘use it or lose it’ is often adopted by employers, however, there has been some recent case law which suggests that unless you inform employee’s that they need to use their holiday before the end of the holiday year, they could be entitled to carry it over.

In the recent decision of Smith v Pimilico Plumbers Ltd [2022] EWCA Civ 70 it was found that an employee would only lose their right to be paid for their accrued untaken holiday where the following conditions are met:

1. The employee must be given the opportunity to take paid leave;
2. The employee must be encouraged to take paid annual leave; and
3. The employee must have been informed that the right to paid leave would be lost at the end of the year if not taken.

The case has placed an additional burden on employers to ensure they can demonstrate the above and avoid an employee being able to argue they should receive a payment for holiday which they did not take in previous years.

Holiday Pay

As you will be aware, an employee must be paid their normal salary for any annual leave to ensure they are not discouraged from using their entitlement.

However, some employers reduce the calculation rate on termination of employment, this is to avoid having to pay them their normal salary for any accrued untaken holiday.

However, the Employment Appeal Tribunal in the case of Conner v Chief Constable of South Yorkshire Police found that if a payment in lieu of holiday is lower than they would receive during employment, this would not comply with the Working Time Regulations, even if they had a contract in place which allowed for the reduction.

This means an employee must receive the same daily rate for holiday which is paid in lieu on termination that they would receive if they took the holiday whilst employed.

There have been a number of changes in relation to holiday pay and calculations recently, and I would recommend you have your policies reviewed if they have not been updated. This is to ensure the policies are still legally compliant.

If you have any questions, please do not hesitate to contact myself or another member of the team on 01983 897003.

We work with employers and employees throughout the UK and we would love to work with you.