423: How much should workers be paid for untaken statutory holiday on termination of employment?

Pay in lieu of holiday on termination of employment may be calculated in the same way as pay for holiday taken during employment. However, Regulation 14 of the Working Time Regulations 1998 (WTR) also allows holiday pay on termination to be paid at a different rate as stated in a ‘relevant agreement’, which includes a clause in the employment contract.

In Connor v Chief Constable of the South Yorkshire Police, the Employment Appeal Tribunal has ruled that pay for accrued but untaken holiday on termination of employment must not be less under a relevant agreement than the amount a worker would have been paid for holiday taken during employment.

Following his dismissal, Mr Connor disputed the calculation of his pay for accrued but untaken holiday. His contract of employment stated that his accrued holiday on termination would be calculated at 1/365 of annual salary for each day’s leave. This was less than the normal holiday pay rate during his employment which was the same as his salaried rate of pay. His employer argued that this was permitted under regulation 14 of the WTR as it was specified in a relevant agreement. Mr Connor brought a claim for unlawful deduction from wages in the Employment Tribunal to recover the shortfall.

The Employment Tribunal rejected Mr Connor’s claim, ruling that the lower rate of holiday pay on termination was permitted under the WTR. However, the EAT has now allowed his appeal on the basis that the Tribunal’s approach was too literal and undermined the health and safety principles behind annual leave. It would be contrary to the purpose of the WTR if payment for accrued holiday on termination could be less than usual pay. Therefore, although a relevant agreement can specify a different calculation method, this cannot be less than the worker would have been paid for holiday during their employment. Mr Connor had therefore been underpaid.

The EAT’s judgment will not affect employers who calculate pay in lieu of holiday on termination of employment in the same way as pay for leave taken during employment. However, employers who currently make use of Regulation 14 of the WTR to pay less, for example, in relation to casual or part-year workers, should consider whether to change their calculation to comply with this decision. We do not yet know whether the EAT’s decision will be appealed. However, it seems likely that this issue may be addressed in the legislative changes to holiday pay which were the subject of consultation earlier this year.

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