Payment in lieu of holiday

In a recent case, the Tribunal has held that employers will not be permitted to pay a token sum to an employee on termination of employment, in lieu of accrued but untaken holiday.  Any payment in lieu made under a ‘relevant agreement’ (which can include an employee’s contract of employment) must be equal to the pay that the worker would have received had he/she taken the leave during employment. 

The Claimant in this case was on a zero hours contract which provided that she would be paid £1 in lieu of untaken holiday on termination.  The Claimant in fact had three days’ untaken leave at the date that she left her employment, and therefore lodged a claim for the employer’s failure to pay her in lieu of her three days’ holiday. 

The Tribunal considered the wording of the Working Time Regulations, which provide that workers are entitled to four weeks’ paid annual leave, with a payment made in lieu of any leave which remains untaken on termination of employment.  The Regulations also state that the amount of such a payment may be that provided for in a ‘relevant agreement’ or the amount that the worker would normally be entitled to as paid leave.  The Tribunal felt that on a literal reading of the Regulations, it would seem possible to provide for a token payment in a contractual document.  However, a recent decision of the European Court relating to the Working Time Directive, (the  European legislation to which the Working Time Regulations are intended to give effect), had confirmed that pay in lieu of leave should be calculated to reflect normal holiday pay, in order to ensure that the worker is not in a less advantageous position than if he/she had sought to take his/her annual leave during employment.  The Tribunal took the view that the Working Time Regulations would need to be considered as far as possible to give effect to the Directive.  Therefore, the Tribunal decided that a payment in respect of leave under a ‘relevant agreement’ is only permitted if it is for the amount equivalent to the pay the worker would have received if the holiday had been taken during employment.  The Claimant’s complaint was therefore upheld, and she was entitled to receive payment for her three days’ leave. 

As this is only an Employment Tribunal decision, it is not binding on any other court or Tribunal.   However, the decision is consistent with recent decisions of the Tribunal and higher courts in which the Regulations are being interpreted in line with the European Directive.  We advise that until this matter is clarified further, employers should err on the side of caution by ensuring that any payments in lieu of untaken holiday made on termination are equivalent to the outstanding holiday actually due to an employee.  


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