How is holiday pay on termination of employment calculated?
On termination of employment, employees are entitled to be paid in lieu of any untaken annual leave accrued up to the date of termination.
In the absence of a relevant agreement between the employer and the employee that provides otherwise, payment in lieu of unused holiday on termination must be calculated according to the formula: (A x B) - C, where A is the statutory minimum period of leave to which the employee is entitled (ie 5.6 weeks); B is the proportion of the holiday year that expired before the termination date; and C is the period of leave already taken by the employee between the beginning of the holiday year and the termination date (see Holiday pay on termination of employment worked examples).
If the employee's contract provides for greater than the statutory minimum holiday entitlement, the employer should calculate the employee's entitlement to accrued holiday in accordance with the contract. Section 1(4)(d)(i) of the Employment Rights Act 1996 requires employers to provide sufficient information about holiday entitlement in the written statement of particulars of employment to enable the accrued holiday entitlement on termination to be precisely calculated.
If the employee has taken more holiday than they have accrued during the leave year, the employer can require them to repay the overpaid holiday pay, or can deduct the appropriate amount from their final payment, only if there is provision for this in the contract of employment, or the employee has given their written consent in advance.