Payment for unused holiday on termination

This is a common question and the short answer is yes, in most cases you do.

Legal position:

Under regulation 14 of the Working Time Regulations 1998, a worker who leaves employment during a leave year is entitled to a payment in lieu of any statutory annual leave that has accrued but not been taken by the date their employment ends. This applies regardless of the reason for leaving, whether the worker resigns, is dismissed, is made redundant, or leaves by mutual agreement.

The statutory minimum entitlement is 5.6 weeks per year for a full-time worker, which equates to 28 days including bank holidays. If your contract provides more than the statutory minimum, the contractual terms will govern how the additional holiday is treated on termination. Some contracts say the extra contractual holiday above 28 days is not paid out on termination, and that is generally enforceable provided it is clearly stated.

How to calculate the payment:

1. Work out how much of the leave year has passed by the date of termination.
2. Calculate the proportion of the annual entitlement that has accrued up to that date.
3. Deduct any leave already taken.
4. Pay the balance at the worker's normal rate of pay.

For example, if a full-time worker with 28 days' entitlement leaves exactly halfway through the leave year and has taken 10 days, they have accrued 14 days and taken 10, so you owe them payment for 4 days.

Overpayment and clawback:

If the worker has taken more holiday than they have accrued by their leaving date, you may only deduct the overpayment from their final pay if the contract or a written agreement permits this. Regulation 14 does not give an automatic right to deduct. If your contract is silent on this, you cannot lawfully make the deduction without the worker's written consent, and attempting to do so could expose you to a claim for unlawful deduction from wages under Part II of the Employment Rights Act 1996.

Practical points:

It is good practice to include clear clauses in your employment contracts dealing with both payment in lieu of unused holiday on termination and the right to recover overpaid holiday. This avoids disputes later.

The payment should appear in the worker's final payslip and is subject to tax and National Insurance in the usual way.

If you are uncertain about the calculation, particularly for irregular hours workers, part-year workers, or those on variable pay, the position has become more nuanced following the Supreme Court decision in Harpur Trust v Brazel (2022), which addressed how holiday pay accrues for part-year workers. The government subsequently introduced reforms from 1 January 2024 under the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which introduced a rolled-up holiday pay option and an accrual method for irregular hours and part-year workers. If your staff fall into those categories, it is worth checking which method applies to them.

If you can share more details about the specific situation, such as the type of worker, the contract terms, and whether the issue is about calculating pay or whether you can make a deduction, I can give you a more tailored answer.