Holiday pay on termination must equal holiday pay during employment

When an employee leaves employment without taking all their accrued annual leave, they will be entitled to a payment in lieu of the untaken leave. The Employment Appeal Tribunal has recently ruled that such a payment cannot be less than the employee would have been paid if they had taken the leave during their employment.

In Connor v Chief Constable of the South Yorkshire Police, Steven Connor had been employed for over 18 years before his dismissal, working the same hours each week. Whilst he was working, he was entitled to the equivalent of what he would have earned during a week’s work when he took a week’s holiday.

Mr Connor’s employment contract incorporated a term which set out how payment for accrued but untaken annual leave would be calculated on termination of employment. This calculation, which South Yorkshire Police followed to calculate how much to pay on termination, resulted in him receiving a lower amount that he would have received if he had taken the annual leave during his employment. The Claimant believed this was wrong and claimed for unlawful deduction from wages. His claim was dismissed by the employment tribunal and he appealed to the EAT.

The law permits the calculation of payment for accrued but untaken leave to be determined by a ‘relevant agreement’, which may take the form of a workforce agreement which applies to the individual worker, a collective agreement which forms part of the agreement between employer and employee, or the employee’s contract of employment. Where no such agreement applies (or is invalid), an employer should follow the formula for calculating such a payment set out in the Working Time Regulations.

The EAT has now confirmed that a relevant agreement cannot put the employee in a worse position financially than they would have been in if they had taken the leave during their employment and been paid for it as required by law. Only a term which provides a formula for calculation which is in keeping with the rights provided for in law will be valid. Otherwise, the formula set out in the Working Time Regulations will apply. Whilst the EAT considered a case brought by an employee, the same position applies to workers who are engaged by a business to undertake work personally, but who are not employees.

To avoid a successful claim for underpayment of wages in respect of holiday pay, employers may wish to check how they are calculating accrued but untaken holiday falling under regulation 13 (4 weeks’ leave) or 13A (additional 1.6 weeks’ leave) of the Working Time Regulations on termination of employment. They must ensure that the calculation does not place workers in a worse position than if they had taken the leave during their employment.

The EAT’s ruling applies only to holiday governed by regulations 13 and 13A of the Working Time Regulations and not, therefore, to contractual annual leave which exceeds the statutory minimum amount of 5.6 weeks a year. Employers should continue to follow what is stated in an employee’s employment contract to determine the appropriate amount to pay for contractual leave accrued but untaken on termination of employment, where this is in excess of the statutory minimum entitlement. In some cases, for example where an employee is dismissed for gross misconduct, they may not be entitled to any payment in respect of such leave, but this will depend on the exact contractual terms.

Many cases about holiday pay have been appealed over the years. It remains to be seen whether this will be so in the case of Connor. In the meantime, the position set out above reflects employers’ legal obligations in respect of payment for accrued but untaken holiday on termination.

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