Paying in lieu of holiday
15 June 2023
The Employment Appeal Tribunal (EAT) has recently considered the correct method for the calculation of statutory holiday pay on termination of employment.
Facts of the case
The claimant’s employment was terminated following a period of long-term sickness absence. Mr Connor (‘C’) was paid in lieu of his accrued but untaken holiday entitlement, calculated in accordance with the terms of his employment contract. His contract specified that payment for accrued holiday would be based on 1/365th of his annual salary for each day’s leave. This meant that C received less holiday pay than he would have received if he had actually taken the holiday, which was paid based on his weekly pay entitlement.
C brought a claim for unlawful deduction from wages, which was rejected by the employment tribunal. The tribunal held that in accordance with regulation 14 of the Working Time Regulations 1998 (WTR), the rate of pay that applied on the termination of C’s employment was that set out in the ‘relevant agreement’, which in this case was his contract of employment. C appealed to the EAT.
The EAT upheld C’s appeal, awarding him the amount of underpaid holiday pay (which was calculated as being £53.90).
The calculation of holiday pay under the WTR refers to a ‘week’s pay’, which for a salaried worker who is not paid any extras (commission, overtime etc.), is calculated by dividing the annual figure by 52. To calculate the pay for any unused holiday, the starting point is the amount of pay that the worker would receive if they were working. The reference in the legislation to a ‘relevant agreement’ does not mean that a worker can be paid less on termination than the amount they would have been paid for holiday taken during their employment. A payment in respect of accrued holiday entitlement which fell below the usual level of pay would not be in accordance with the WTR.
In view of the fact that the calculation of holiday pay on termination under C’s contract was not compliant with the WTR, the EAT decided that his holiday pay entitlement should be calculated in accordance with the provisions of regulation 14(3) WTR. The starting point was the total amount of statutory holiday in a full year (5.6 weeks), which over 52 weeks accrued at the rate of 0.11 weeks of holiday per week. The period of the leave year that had expired before C’s termination was eight weeks, meaning that he had accrued 0.88 week’s holiday at the time his employment terminated. He had not taken any holiday, so he was entitled to receive 0.88 week’s pay, calculated by dividing his annual gross pay by 52.
The Birketts view
This decision provides confirmation that if holiday pay is calculated on termination by reference to a ‘relevant agreement’, which can include a contract of employment, it must not result in payment at any lower rate than if the worker is taking holiday during employment. This would otherwise undermine the purpose of the WTR.
The EAT’s judgment follows previous decisions that have considered the correct rate of holiday pay in cases where a worker has been unable to take holiday due to sickness absence, so it is not wholly unexpected. Employers should ensure that if their existing employment contracts contain provision for payment in lieu of holiday on termination, the calculation does not result in a lower payment to the worker than they would otherwise have received during employment, in respect of their statutory holiday entitlement.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2023.