Holiday Pay on Termination – Entitlement Stays the Same, Even When Paid in Lieu
Key Contact: Claire Knowles
Author: Adam McGlynn
The Employment Appeal Tribunal (EAT) has recently issued a ruling regarding the calculation of holiday pay upon the termination of employment. The ruling clarifies that an employment contract or any other agreement cannot include a formula that would result in workers receiving less pay for accrued but untaken statutory holiday than they would have received if they had worked during that period or taken that period as leave as part of their employment.
Connor v Chief Constable of the South Yorkshire Police 
Mr. Connor had been employed by the Chief Constable of the South Yorkshire Police from 1 November 2002 to 29 May 2020 when he was dismissed due to a prolonged illness. While it was agreed that Mr. Connor was entitled to be paid in lieu of his accrued but untaken holiday, a dispute arose regarding the calculation method.
According to Mr. Connor’s employment contract, the payment for accrued holiday at the end of his employment would be based on “…1/365th of annual salary for each day’s leave,” subject to statutory deductions. However, when calculated using this formula, Mr. Connor received a lower amount than he would have if he had taken the holiday. As a result, he brought a claim for unlawful deduction from wages but he was initially unsuccessful when the tribunal ruled that the payment should be calculated in accordance with his contract. Mr Connor appealed the decision to the EAT.
The EAT ruled that any formula used for calculating holiday pay must align with the rights provided under the Working Time Regulations 1998 and any relevant agreement cannot alter this approach. This means that the payment in lieu of untaken annual leave must not be less than the statutory amount owed for both the four weeks of leave required by EU law and the additional 1.6 weeks of leave provided for by UK law.
Implications for Employers
Employers should ensure that their calculation methods align with the rights provided by the Working Time Regulations, guaranteeing that employees receive the appropriate amount they would have earned if they had worked or taken the leave during their employment.
Following this ruling, employers who have been calculating payment in lieu of holiday according to their contracts will need to change to the new approach, and may wish to review their contracts as a reminder to comply with this ruling. Any provisions that stipulate a nominal payment or an amount lower than what the Working Time Regulations 1998 require for accrued but untaken leave will be deemed invalid.
While the ruling prohibits the use of formulas resulting in inadequate payment for statutory holiday, it does not restrict employers to limit any payment for accrued but untaken contractual holiday which exceeds the statutory holiday entitlement. This means employers still have the ability to place certain restrictions on the payment for additional contractual holiday beyond the legal requirements.
For advice on any of the topics discussed, contact the Employment team at Acuity Law.