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Holiday pay on termination – a thorny issue for employers

The long running saga of entitlement to holidays and holiday pay, and whether the Working Time Regulations 1998 (WTR) adequately implement the underlying European Directive, continues.

A recent case has addressed the issue of “what payment for accrued but unused holiday is an employee entitled to receive when their employment ends”.

WTR say that this is either (a) the amount provided for in a relevant agreement – most commonly the individual’s contract of employment or (b) if there is no provision in a relevant agreement then the sum that is provided for in WTR – essentially what would have been paid to the employee had he taken the holiday during his employment.

Some contracts of employment specifically provide that pay in lieu of unused holiday on termination is a set amount. This may apply in all circumstances and/or limit the sum to a nominal amount (often £1) where the dismissal has been for gross misconduct.

In this particular case the employee was on a zero hours contract and the contract stated that on termination there would be a payment of £1 in relation to any untaken holiday – it was agreed that the individual had 3 days’ unused leave and that if this had been taken during employment the value would be £176.

The Tribunal decided that in line with the decision in previous European cases what is required is that the employee is put in a position that is comparable to the position they would have been in had the holiday been taken during employment. In other words pay in lieu of holiday has to be calculated to reflect normal pay. The employee was therefore awarded £176.

As a Tribunal decision this is not authoritative but nevertheless we recommend that all payments in lieu of unused holiday are now calculated on the basis of normal pay.

Tell us about your holiday pay issues – has pay in lieu of holiday been a problem for your business?

 

 

 

 

 

 

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further