How To Work Out Holiday Entitlement When Leaving A Job
In our most recent article, we discussed whether employees are legally entitled to carry over their holiday entitlement from one leave year to the next. But what about when it comes to working out any holiday pay when leaving a job? One of the many tasks employers need to complete when a member of staff leaves is to work out how much holiday was not taken and, therefore, any holiday pay owed as part of the final pay. It is important to calculate any remaining holiday entitlement and hence how much should be paid in accordance with the law and the individual’s contract of employment. In this article, we will explain how to work out holiday entitlement when leaving a job.
Payment in lieu of accrued contractual holiday leave
An employee is only ever entitled to receive payment for statutory leave they have not taken when their contract comes to an end. This applies regardless of the reason why the member of staff leaves – even if they are terminated for gross misconduct.
Regulation 14(3) of the Working Time Regulations 1998, which covers compensation for untaken leave, states, “where the proportion of leave taken by the worker is less than the proportion of the leave year which has expired, his employer shall make him a payment in lieu of leave”. The statutory pro-rata payment is referred to as “pay in lieu of holiday”.
Employment contracts also typically stipulate that:
- Holiday accrues throughout the last year of employment, and
- When an employee leaves, they are entitled to a pro-rata payment for their accrued unused holiday
In most cases, the pro-rata rule on holiday leave pay on termination applies to statutory and contractual holiday entitlement.
What if contractual holiday entitlement is not included in the employment contract?
If the employment contract does not include a provision for the payment in lieu of contractual leave (i.e. leave that is over and above the statutory provision), an employee may seek to rely on an implied term that contractual holiday accrues evenly throughout their final holiday year, and, therefore, they should receive both payments in lieu of both statutory and any additional holiday. As established in the case of Morley v Heritage plc [1993] IRLR 400, this cannot be automatically presumed. That said, it is likely that an employee in this situation will be able to establish that such terms were implied due to custom and practice. For this reason, it is important that employers include a provision within their employment contracts making it clear whether any payment will be made on termination of employment relating to unused contractual holidays and, if so, how it will be calculated.
How is holiday pay on termination of employment calculated?
The way in which you calculate holiday pay on termination of employment will depend on the type of employment, as follows:
Full-time employees
A full-time employee who works 5 days per week is entitled to 28 days of paid holiday each year. This means that each month, the employee’s accrued leave increases by one-twelfth. For example, if their contract comes to an end in March, they will have (28/12 x 3) 7 days of accrued annual leave.
Zero-hours employees
For employees on zero-hour contracts, because the number of working hours is variable, the amount of accrued leave can be calculated by using the number of hours worked. This is worked out on the basis of 12.07% of all hours worked a year. Hence, for every 40 hours worked, an employee on a zero-hours contract accrues 4.8 hours of annual leave.
Regulation 14(3b) of the Working Time Regulations 1998 provides a useful formula when calculating how much pay is due for untaken leave. The formula is:
(A x B) – C
‘A’ refers to the minimum amount of leave entitlement
‘B’ refers to the amount of annual leave accumulated prior to termination
‘C’ refers to the amount of leave taken between the start of the leave year and the termination date.
For example, for an employee who is entitled to 5.6 weeks of leave, is terminated 4 months into their leave year, and they have taken 1 week of leave, the calculation is as follows:
5.6 x (4 / 12) – 1 = 0.87 weeks in lieu
Final words
Given the complexity of working out holiday entitlement when leaving a job, it is all the more important that employers have a clear provision in their employment contracts. Employers should always exercise care when drafting contractual clauses relating to payment in lieu of untaken holiday. Any express right to pay in lieu of untaken holiday on termination may need to include clarification so that it only relates to the holiday year in which termination takes place. Doing so will ensure that any leave accrued in previous years that has not been taken does not count towards holiday pay owed on termination of employment.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have an experienced team of employment law Solicitors who can assist you with any legal matter relating to your employment contract, including annual leave entitlement disputes. To make an appointment, please contact us or call us on 01932 840 111.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have an experienced team of employment law Solicitors who can assist you with any legal matter relating to your employment contract, including annual leave entitlement disputes. To make an appointment, please contact us or call us on 01932 840 111.