Reviewing an employee handbook, I noticed that it includes a clause to the effect that an employee summarily dismissed for gross misconduct will forfeit entitlement to payment for unused leave. Can you advise me as to whether this is lawful?
The legal verdict
Esther Smith, partner at Thomas Eggar
I expect that the provision in the handbook predates the implementation of the Working Time Regulations 1998, which created a statutory entitlement to paid annual leave for the first time in the UK.
Now that all employees have a statutory right to minimum periods of paid annual leave, it is not possible to contract out of it. As a result, the right to receive payment in lieu of accrued holiday on termination of employment, for whatever reason, is fairly absolute.
This means that if you did rely on the provision in the handbook, you would be at risk of a claim from the employee in question for unpaid holiday pay.
Esther Smith is a partner in Thomas Eggar‘s Employment Law Unit.
Martin Brewer, partner at Mills & Reeve
Everyone drafting employment contracts, handbooks or policies needs to understand that the employment relationship has terms imposed into it from a number of sources, not least of which is the law.
In this case, the relevant legislation is the Working Time Regulations 1998 and its associated case law. The WTR include the entitlement to paid annual leave (5.6 weeks) as well as rules about taking entitlement to annual leave, pay for annual leave and what happens when employment terminates during a holiday year.
There is also some significant case law around these entitlements. But your question is about rights on termination. Regulation 14 says that, on termination of employment, an employee is entitled to pay in lieu of accrued untaken statutory holiday.
This payment in lieu is calculated in accordance with either a so-called relevant agreement (it is very unlikely that a handbook would constitute a relevant agreement but not impossible so it might be worth checking) or, where no relevant agreement exists, the pay that the worker would have received if they had actually taken a period of holiday calculated in accordance with the formula set out in regulation 14.
The wording of regulation 14 is imperative. It says that, where a staff member’s employment is terminated during a leave year, and the leave taken at the point of termination is less than the leave accrued at that point, "his employer shall make him a payment in lieu" of the untaken leave (my emphasis).
Interestingly, regulation 14 also says that the sum payable can be determined by a relevant agreement (otherwise the formula set out in regulation 14 is used).
Case law has confirmed that the wording of regulation 14 means that the sum cannot be zero. But this leaves the question open as to whether a relevant agreement could say that, in the case of termination for gross misconduct, the sum could be nominal.
Theoretically, this scenario looks attractive. But in a recent case called Schultz-Hoff v Deutsche Rentenversicherung Bund
, it was stated that, where a worker "has not been able, for reasons beyond his control, to exercise his right to paid annual leave before termination of the employment relationship, the allowance in lieu to which he is entitled must be calculated so that the worker is put in a position comparable to that he would have been in had he exercised that right during his employment relationship".
Although this case concerned someone who was off on long-term sick leave, the judgment does seem to suggest that, in any case where the worker could not take leave, s/he must be given their normal holiday pay in lieu.