HRD & Payroll Solutions continues to bring HR Zone members a range of HR tips. This week’s tip looks at recovering holiday pay on termination of contract.
Q: Can pay be deducted from final wages if an employee has taken more days holiday then their entitlement allows at the point when their contract comes to an end?
A: Workers have entitlement to holiday pay under the provision of the Working Time Regulations 1998 and, in many cases, under the terms of their employment contracts. The Regulations give a minimum entitlement to paid holiday leave but many employers give considerably more than the statutory minimum. When an employee leaves, the Regulations require any “undertaken” entitlement to be paid on termination.
Example: An employee is entitled to 24 days annual holiday during a holiday year. The employee leaves half way through the holiday year, by which time the employee has taken 10 days paid leave. The entitlement for six months is 12 days, so the shortfall of two days must be paid on termination. There is a statutory method of calculating holiday pay on termination if the employee’s contract does not specify the procedure.
However, if a worker has taken more than the appropriate proportion of the annual entitlement at the time of leaving, there is no statutory requirement for workers to repay the value of the “overtaken” holiday, or for the employer to deduct it from final wages. Whether it can be recovered by the employer is a contractual matter.
An employer’s ability to make a deduction in respect of overtaken holiday pay is governed by the protection of wages provisions of the Employment Rights Act 1996. Employers cannot arbitrarily make deductions from wages at any time, and that includes the final wages due on termination.
For a deduction from wages to be lawful, it must meet one of three specific conditions. The relevant condition is that the deduction must be required or authorised by an existing provision of the worker’s contract. If there is no provision in the worker’s contract that allows for the recovery of overtaken holiday, any such deduction is unlawful and the worker is entitled to seek recovery by applying to an Employment Tribunal.
Example: An employee is entitled to 24 days annual holiday during a holiday year. The employee leaves half way through the holiday year, by which time the employee has taken 15 days paid leave. The entitlement for six months is 12 days, so the employer wishes to recover the value of the extra three days. The worker’s contract authorises such a deduction so the employer reduces the worker’s final wages by the value of three days holiday.
Although many employers have the practice of recovering overtaken holiday pay, their employment contracts are often silent on the matter of overtaken holiday. Any deduction in that situation is unlawful.
Previous HR tips
Racial balance
Frequent absence
Bad language in the workplace
Employing EU nationals
Revealing employee information
Wage deductions for parking fines
Sex discrimination
Disciplinary records
Custom and practice
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Gross misconduct
Employee sent to prison
HR Tip – Probation periods
Breach of notice period
Notice for senior staff
Developing women managers
A promotion that failed
Fixing holidays
Holiday for temporary employees
A redundancy problem
Behaviour outside work
Suspension from work
Informing employees of new legislation
Deductions from wages
Children on site
Workplace affairs
Disabled workers
Attitude problems
Redundancy selection
Custom and practice
Working Bank holidays
Disciplinary and dismissal procedures
Time off work for funerals
References
Translating rules
Banning smoking at work
Burden of proof
Contracts of employment
