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Holiday Entitlement When Leaving a Job
Posted by Robin on 29 Aug, 2024 in Employer Guide
The Working Time Regulations 1998 (WTR) govern the rights of workers to paid annual leave in England & Wales. The WTR are clear, by virtue of Regulation 13(9)(b) that "Leave to which a worker is entitled under this regulation...may not be replaced by a payment in lieu except where the worker’s employment is terminated."
This provision is critical to ensure that workers are taking their holiday entitlement as time away from work and are not expected to attend work with an additional payment being made as compensation for leave. This has its roots in the fact that the WTR are primarily intended as health & safety-related legislation.
Regulation 14 WTR (Compensation related to entitlement to leave) comprehensively sets out how to handle the calculation of the payment to which a worker is entitled when their employment ends.
This provision is critical to ensure that workers are taking their holiday entitlement as time away from work and are not expected to attend work with an additional payment being made as compensation for leave. This has its roots in the fact that the WTR are primarily intended as health & safety-related legislation.
Regulation 14 WTR (Compensation related to entitlement to leave) comprehensively sets out how to handle the calculation of the payment to which a worker is entitled when their employment ends.
When does Regulation 14 apply?
Regulation 14 applies where two conditions are made out. Firstly, the employment of the worker must have ended during the course of the leave year. Secondly, at the point termination occurs, the proportion of holiday entielement taken by the worker differs from the proportion of the leave year that has passed. Although the legislation uses the word "differ", practically speaking, the right to be paid in lieu can only apply where the proportion of leave taken is less than the proportion of the leave year that has passed.
To provide a trivial example: John is entitled to 28 days' paid annual leave per year and his employment terminates on the 30 June (the holiday year is January - December). At the point of termination he has taken 7 days from his holiday entitlement. In this case, the proportion of leave taken (25%) is less than the proportion of the leave year that has passed (50%).
To provide a trivial example: John is entitled to 28 days' paid annual leave per year and his employment terminates on the 30 June (the holiday year is January - December). At the point of termination he has taken 7 days from his holiday entitlement. In this case, the proportion of leave taken (25%) is less than the proportion of the leave year that has passed (50%).
What happens if Regulation 14 applies?
Where Regulation 14 applies, an absolute obligation is placed on the employer to make a payment in lieu of holiday entitlement to the worker. It is important to understand that this is not an option to make a payment in lieu. Regulation 13(9) uses the word "may": "may not be replaced..." suggesting that it "may be replaced" if the conditions are met. This is not the case. Regulation 14(2) clearly states, "Where the proportion of leave taken by the worker is less than the proportion of the leave year which has expired, his employer shall make him a payment in lieu of leave".
How do I calculate the payment in lieu?
Regulation 14(3) sets out a clear formula for calculating the payment. It is first critical to identify the payment that would normally be made to the worker for taking a period of regular leave. As we discuss in our Ultimate Guide to UK Statutory Holiday Allowance, this can be tricky and you should apply the rules normally in place for your organisation. Once you have identified this, the calculation for the payment on leaving is:
The workers holiday entitlement multiplied by
The proportion of the leave year expired at the termination date less
Any leave already taken
Any partial days are rounded up to the nearest half day.
Returning to John, our example above, the calculation would be:
28 days multiplied by
50% less
7 days
Meaning John would be entitled to be paid 7 days at his normal rate.
If he was a salaried worker paid at a rate of £200 per day, his payment in lieu would be £1400 subject to tax and national insurance deductions.
The workers holiday entitlement multiplied by
The proportion of the leave year expired at the termination date less
Any leave already taken
Any partial days are rounded up to the nearest half day.
Returning to John, our example above, the calculation would be:
28 days multiplied by
50% less
7 days
Meaning John would be entitled to be paid 7 days at his normal rate.
If he was a salaried worker paid at a rate of £200 per day, his payment in lieu would be £1400 subject to tax and national insurance deductions.
What about carry over leave?
If a worker has carried over holiday entitlement for one of the reasons specified in the WTR then this is also subject to the payment in lieu provisions. Those reasons are that the worker has been unable to take leave because of sick leave or some other form of statutory leave (e.g. parental leave) or because the employer has failed to allow them to take leave or remind them to take leave.
What about irregular hours workers?
If you have chosen to implement the rolled-up holiday pay method for irregular hours workers then there is no payment in lieu on termination. The holiday pay for the workers is included in the rate you pay them day-to-day for their work.
What about part-time and fixed-term workers?
The right to payment in lieu of holiday entitlement on termination applies equally to part-time workers and fixed-term workers. You would use the same calculation methodology.
How we can help?
Our snappily named Leaving Employee Holiday Calculator implements the formula under the WTR so you can always ensure you are compliant (including rounding up to the nearest half day). And, Leavetrack itself tracks your employees' holiday entitlements so you will always know what their outstanding entitlement is on termination of employment.