If an employee receives a payment in lieu of notice, will their annual leave entitlement accrue up to the termination date, or the end of the notice period?

If an employee receives a payment in lieu of notice, they are generally entitled to receive payment for any benefits that would have accrued during the notice period. However, the method of calculating payment for statutory holiday that an employee has accrued but not taken at the time of dismissal, as set out in reg. 14 of the Working Time Regulations 1998 (SI 1998/1833), is specifically based on the actual termination date, not the date on which the employment would have terminated had statutory notice been given. This means that, even if the giving of proper notice would have given rise to an increased entitlement to statutory holiday, this need not be reflected in the payment of holiday accrued up to the termination date under reg.14.

Entitlement under reg.14 does not vary if the employer makes a payment in lieu of notice to cover the full notice period. It is the actual date of termination that matters, not the date that termination would have occurred if notice had been given, and the employer should calculate payment under reg.14 accordingly.

In addition to statutory rights relating to holiday under the Working Time Regulations 1998, holiday entitlement is also a contractual right. However, while, as a matter of contract, the employee would have continued to accrue holiday over the course of the notice period, had they worked it, this will not necessarily need to be reflected in the payment in lieu of notice. Holiday would have accrued in the notice period, but it could also have been taken by the employee before the contract ended, in which case there would have been no further payment required at the end of the notice period. Where there are alternative options as to how a contract could have been performed, there is a general principle in calculating losses that the party paying the compensation would have performed the contract in the way most advantageous to itself. If the employer is entitled, under the contract, to require the employee to take holiday at specified times, it can be assumed that it would have required the employee to take their accrued holiday during the notice period (subject to the requirement in reg.15 of the Working Time Regulations 1998 for the employer to give twice as much notice as the number of days' leave in question, or such requirements for notice that may be set out in the contract of employment or a workforce agreement).

Therefore, in general, the payment in lieu of notice need not reflect holiday that would have accrued beyond the actual date of termination, unless the contract provides otherwise. However, in practice, employers may decide to include this in the payment in lieu to avoid any dispute over the point.