Holiday pay on termination of employment worked example 2

Scenario

Alex has worked for her employer since 2 February 2015. Her contract of employment stipulates that her normal working hours are 9am to 5pm on a Monday to Friday basis. Alex's annual salary is £26,000 and she is paid monthly on the last working day of the month in 12 equal instalments, irrespective of the work done in the period. A separate clause in her contract provides for the payment of holiday pay to be calculated precisely.

Alex gives her employer notice that her employment will terminate on Monday 8 June 2015, part way through the fifth month of her employment. The employer's leave year is based on the calendar year. Alex is entitled to 28 days annual leave including bank and public holidays and has taken three days' leave during her period of employment.

Action

The employer must pay Alex pay in lieu of holiday of £810.26 at the same time that it pays outstanding salary for June 2015.

Explanation

Workers are entitled to a statutory minimum of 5.6 weeks' paid leave in each year - four weeks under reg.13 of the Working Time Regulations 1998 (SI 1998/1833) and an additional 1.6 weeks under reg.13A. The leave year is normally set as agreed between the employer and its workers. Alex is a worker as she works under a contract of employment (reg.2 of the Working Time Regulations 1998.

For workers in their first year of employment, a system of accrual operates. This apportions the availability of leave, providing one-twelfth of the annual salary at the start of each month, rounded up to the nearest half day (reg.15A of the Working Time Regulations 1998). On this basis, Alex has accrued 12 days' leave at 1 June 2015, the start of her fifth month of employment (28 x 5/12 = 11.7).

Where a worker loses part of his or her entitlement to annual leave because the employment terminates during a leave year, the worker has a right to payment in lieu (regs.13(9) and 13A(6) of the Working Time Regulations 1998).

The method of calculation of a week's pay is set out in ss.221 to 224 of the Employment Rights Act 1996. In the case of a worker with regular working hours, a week's pay is what he or she would earn for a normal working week. A worker's normal working hours are those fixed by his or her contract of employment.

Alex's normal working hours are 9am to 5pm on a Monday to Friday basis and she is paid an annual salary of £26,000, which equates to £500 for a normal five-day working week (£26,000/52).

In the absence of a relevant agreement between the employer and worker, payment in lieu of leave is calculated using the statutory formula (A x B) - C, where A is the period of leave to which the worker is entitled, B is the proportion of the worker's leave year that expired before the termination date and C is the period of leave taken by the worker between the start of the leave year and the termination date (reg.14 of the Working Time Regulations 1998).

In Alex's case, the above formula is used and the holiday calculation is therefore:

(28 x 19/52) - 3 = 7.23 days

Alex is therefore entitled to be paid 7.23 days' holiday.

The written statement of terms and conditions of employment necessarily provided to an employee within two months of his or her starting work must include particulars of any terms and conditions relating to holiday and holiday pay, the particulars given being sufficient to enable the employee's entitlement to accrued holiday pay on termination of employment to be calculated precisely (s.1(4)(d)(i) of the Employment Rights Act 1996).

Alex's statement provides for a day's holiday to be calculated using the formula of annual salary divided by the number of working days in the year (excluding periods of annual leave and weekends).

The holiday pay calculation for Alex is therefore:

(5 x 52) - 28 = 232 working days

(£26,000/232) x 7.23 = £810.26

Notes

If it wishes an employer can agree more favourable holiday terms and conditions.

If an employee has taken more annual leave than he or she has accrued during the leave year, the employer can ask the employee to repay the overpaid holiday pay.

Warning

There is no longer a requirement for a worker to serve a qualifying period before entitlement to statutory holiday arises. The right to paid annual leave accrues from the start of employment.

There is no entitlement for employees to be paid in lieu of any leave not taken at the end of the leave year with regard to the four weeks' statutory leave under reg.13 or the 1.6 weeks' additional leave under reg.13A. Payment in lieu is permitted only on termination of employment.

Workers may complain to an employment tribunal if their employer fails to pay holiday pay to which they are entitled under the Working Time Regulations 1998.