This week Nicholas Snowden, Senior Solicitor at Clarkslegal LLP and Helen Badger, employment law expert, Browne Jacobson present their ideas on the rules governing holiday pay and the Working Time Directive.
“If a contract stipulates that accrued holiday pay is lost if someone is dismissed for gross misconduct, is this an illegal deduction from wages? Under the Working Time Directive is accrued holiday pay always paid when an employee leaves … i.e. is it an automatic right?”
Nicholas Snowden, Senior Solicitor at Clarkslegal LLP
It is possible to stipulate in a contract of employment that accrued but untaken contractual holiday pay will not be paid in the event of dismissal for gross misconduct, without the exercise of this right constituting an unlawful deduction from wages.
However, the situation is more complex in relation to the statutory entitlement to annual leave. The case of Witley & District Mens Club v Mackay  suggests that it may be possible for an employer to reserve a contractual right to make a reduced payment in relation to accrued but untaken statutory holiday in the event of gross misconduct, but that it is not possible to provide for no payment at all to be made. This is because Regulation 14(2) of the Working Time Regulations 1998 provides:
- “Where the proportion of leave taken by the worker is less than the proportion of the leave year which has expired, his employer shall make him a payment in lieu of leave in accordance with paragraph (3).”
- Regulation 14(3) states that the payment due shall be either (a) “such sum as may be provided for the purposes of this regulation in a relevant agreement”, or (b) where there are no provisions of a relevant agreement which apply, a sum calculated according to a set formula.
The Employment Appeal Tribunal (EAT) latched on to the words “such sum” in Regulation 14(3)(a) and held that this meant that an agreement could not provide for no payment at all. The EAT did however leave the way open for relevant agreements to provide for a reduced payment.
As an example, a full-time employee working five days a week, has a statutory minimum holiday entitlement of 20 days per annum. That same employee has a contractual entitlement of 25 days holiday each year (inclusive of the statutory minimum of 20 days).
His contract of employment provides that, in the event of dismissal for gross misconduct, the company will not pay him in relation to any accrued but untaken contractual holiday entitlement and will only pay him half his normal daily rate for any accrued but untaken statutory holiday entitlement.
The employee is subsequently dismissed halfway through the holiday year for gross misconduct, having taken none of his entitlement for that holiday year. The employer could refuse to pay him for any holiday accrued over and above his statutory entitlement (i.e. 2.5 days), but would have to pay him half the employee’s daily rate for the remaining 10 days accrued but untaken holiday.
Please note that there is no guarantee that this approach would be approved by a Tribunal and the safest course is to pay the employee for all accrued but untaken statutory holiday entitlement.
Helen Badger, employment law expert, Browne Jacobson
There is a distinction between employees’ rights under the Working Time Regulations 1998 and their entitlements according to their contract.
The regulations set out an employee’s minimum entitlement -that where a contract is terminated during the course of the leave year, and an employee has taken less than the accrued holiday entitlement, the employer is required to make a payment in lieu of that leave. If the contract does not make clear how much that payment should be, it is calculated according to a set formula.
As such, withholding holiday payment altogether in the event of termination for gross misconduct is unlawful, in relation to the minimum statutory entitlement of four weeks. This does not apply to any additional leave allowed for in the contract.
However, there would appear to be nothing preventing an employer from making a nominal payment only, provided this is in the contract of employment. For example, an employer could consider a clause providing for payment of £1 holiday pay in the event that employment is terminated for gross misconduct. I would sound a note of caution, however, that this interpretation has not been tested through the courts.
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