Wed 14 Jun 2023

Is a holiday worth less on termination?

The calculation of holiday pay continues to remain in the spotlight, this time when dealing with payment of accrued but untaken holidays on termination.

The correct calculation of paid holiday has been a focus of tribunal claims for a number of years.  The Working Time Regulations deal with both the implementation of the 20-day EU entitlement, and the additional domestic 8-day entitlement.  Case law over the past few years, focussing on how the 20 day entitlement should be remunerated, has created a two-tier system, with differences emerging in what must be included in the calculation of the EU entitlement and the additional UK entitlement.  Simplifying this system to merge both these entitlements into one 28 day entitlement is one of the proposals that are currently subject to UK Government consultation.

The historical cases dealing with calculation of holiday pay have usually dealt with payment of holiday during employment, and not payment in lieu on termination of employment.  The recent Employment Appeal Tribunal (EAT) judgment in Connor v Chief Constable of the South Yorkshire Police deals with the calculation of pay for accrued but untaken holidays on termination of employment.  Payment for accrued holidays on termination of employment is treated more flexibly than payment for holidays during employment.  While employers may calculate pay in lieu in the same way as pay during employment, the Working Time Regulations also provides for payment under a "relevant agreement".  Although that may sound like it relates to more unionised workplaces, in fact, a relevant agreement can simply be a clause in an employment contract in this context.  Some 20 years ago, the EAT held that such a relevant agreement could not provide for no payment at all.  Then, 10 years ago, a Scottish employment tribunal held that a worker could not be paid a token amount in lieu of unused holidays.  However, it was not clear if that only applied in cases when workers had been unable to take the accrued holiday and, in any event, it was not a binding decision.

In the Connor case the parties had agreed how much holiday was due, but not how it should be calculated.  The employer based payment on 1/365th of salary for each day's leave based on a term in the claimant's contract.  That resulted in him receiving less pay than he would have had he taken the holiday during employment.  An employment tribunal decided that the correct calculation had been made based on the "relevant agreement" in the contract.  However, on appeal the EAT disagreed. Reiterating that the right to paid holiday pay fulfils a health and safety purpose, the EAT held that any payment in lieu that fell below the usual level of pay would be in breach of the Working Time Regulations.  A sum provided for in a relevant agreement could not result in a worker receiving less than the amount they would normally be paid for working the same hours.

The practical effect for the claimant in this case was that the EAT ordered the employer to pay him £53.90 in respect of an underpayment of holiday pay.  The key point for employers is that, when calculating accrued but untaken holiday pay on termination of employment, the starting point for any calculation is the amount that would have been paid for the holidays that are due had the worker been working.  This applies to the full 28 day holiday entitlement under the Working Time Regulations, however a different approach could still be taken for any contractual holiday entitlement over and above that 28 day entitlement.

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