The original basis for the Working Time Regulations is the Working Time Directive. The Directive is a health & safety measure intended to ensure the safety of workers by making sure that they have appropriate rest breaks during work and rest periods between shifts. In addition, it also provided for statutory minimum holidays to ensure workers took time away from their jobs.

As the Directive is a health & safety measure, it does not allow employers to make payments to workers instead of holiday except in very limited circumstances.

This of course makes sense. It would defeat the purpose of a health & safety measure if workers could simply choose to continue to work and employers could pay them for that.

Regulation 13(9)(b) of the Working Time Regulations 1998 states.

It is clear from the Regulations that the only grounds on which a payment in lieu of holiday can be made is upon the termination of employment.

Regulation 14 of the Working Time Regulations goes on to set out the methodology for calculating the compensation due to the worker.

The first situation envisaged is where the worker's employment has terminated and the proportion of leave they have taken is less than the proportion of the leave year which has expired at the point of termination.

In this case, the formula is very straightforward. Using the descriptions set out below, the worker's entitlement on termination is equivalent to:

(A x B) - C

A: the usual holiday entitlement for the worker;
B: the proportion of the leave year which has expired before the termination date;
C: the period of leave taken by the worker in the current leave year.

As a simple example, assuming a worker has 30 days leave and their employment terminates 6 months into the year (having taken five days annual leave already), the calculation would be:

(30 * 0.5) = 15 - 5 = 10 days

The 10 days would be paid to the worker at the usual rate for their annual leave.

The second scenario is where the worker has taken more leave than they have accrued by the point of termination of their employment. Regulation 14(4) states:

It is important to note here that there is no freestanding right for an employer to recover any excess of paid annual leave that might have been taken by a worker. The agreement between the employer and the worker needs to set out how any overuse of paid annual leave will be dealt with.

In most cases, this is managed via a deduction from the worker's final pay.

In short, no. Even in cases of gross misconduct the worker is entitled to receive a payment in lieu of untaken holiday. You must be very careful as a failure to make the appropriate payments could result in both a claim by the worker against your company but it would also run the risk of rendering unenforceable any other contractual provisions you might want to rely on e.g. clauses restricting the worker from working for competitors.

You may want to consider how you might ensure workers taken any accrued but untaken holiday during their notice period. This might of course not be possible depending on the length of the notice period and the nature of their role but it is a means to reduce additional payments to be made by the company. Using absence management software can help your HR team or managers keep track of how workers are using their leave during the year and avoid the building up of large pots of leave.