Can an employment contract permit an employer to pay an employee an amount in lieu of holiday on termination of employment which is less than the employee would have been paid if the holiday had been taken during their employment?
No, as held by the Employment Appeal Tribunal (EAT) in the case of Connor v Chief Constable of the South Yorkshire Police .
On termination of employment the amount an employee is entitled to be paid in lieu of any accrued untaken holiday is as set out in reg. 14 of the Working Time Regulations 1998 (WTR) as either:
- The amount specified in a ‘relevant agreement’ – (usually an employment contract); or
- Where there is no relevant agreement, the statutory formula, which is (A x B) – C, where:
- A is the basic 20 days under reg. 13 (which implements the Working Time Directive) and the additional entitlement of 8 days under reg 13A (which is under UK law only)
- B is the proportion of the leave year which expired before the termination date; and
- C is the period of leave taken by the employee between the start of the leave year and the termination date.
The WTR does not prescribe how a payment in lieu of unused holiday should be calculated under a relevant agreement.
Some employers include a clause in a contract of employment that provides for a nominal sum to be paid in lieu of accrued holiday (for example £1) if the employee is a ‘bad leaver’ (i.e., they leave without giving or serving the requisite contractual notice without the employer’s permission, or when they are dismissed on grounds of gross misconduct).
Whilst the Ellisons Employment Team have always advised that it is unlikely that such a contractual provision would be permitted, until the judgment in this case, we did not have any binding authority on this issue.
Facts of the case
Mr Connor was employed by the Chief Constable of the South Yorkshire Police between 1 November 2002 and 29 May 2020 when he was dismissed following over a year on sick leave.
A dispute arose as to how his pay in lieu of holiday should be calculated. His contract of employment provided for the formula of 1/365th of annual salary for each day’s leave. The formula is in line with the Apportionment Act 1870 and is a formula that some employers use when calculating holiday pay on termination of employment.
The formula using calendar days, as opposed to the working day, resulted in a lower amount than Mr Connor would have received if he had taken holiday during his employment.
Mr Connor bought a claim for unlawful deduction of wages.
The Tribunal held that the rate of pay that applied on termination was that as set out in the relevant agreement, which was the formula set out in Mr Connor’s employment contract.
Mr Connor appealed arguing:
- that whatever the provisions of the Apportionment Act, the modern approach should be that set out in the (relatively) modern legislation, which reflects modern working practices, using the working day approach;
- the formula used by the Chief Constable did not engage the provisions in the WTR; and
- the provisions in the WTR should be interpreted as only permitting payment under a relevant agreement of an amount equivalent to the pay a worker would have received had they actually taken the holiday.
The EAT allowed the appeal holding that the purpose of reg.14 is to provide a formula of a calculation which promotes the right to leave and the attendant payment of holiday. That being the case reference to ‘such sum as may be provided … In a relevant agreement’ must provide a formula which is in keeping with the rights provided for in the WTR and a relevant agreement could not provide a formula which would result in a worker being paid less than the usual amount they would have been paid for working when holiday pay is calculated.
As the EAT had decided that the WTR applied, the method of calculation was the (A x B) – C formula. In this case it was a difference of a further £53.90 to be paid.
The judgment addresses the previously grey area of whether a relevant agreement may provide for a nominal payment, or another sum less that then statutory amount. The EAT in this case appears to answer the question. The formula set out in the WTR sets a baseline below which a relevant agreement cannot go.
Employers should review their contracts of employment considering this judgment. It is worth noting that this applies to the working time minimum holiday entitlement of 28 days and not for any additional contractual holiday entitlement.
If any employer requires a review and/or update of their employment contract(s), or any advice on this issue, it can contact a member of the Employment Team.