In this article, we consider contractual terms relating to annual leave.
Section 1 of the Employment Rights Act 1996 requires employers to include within the written statement of employment particulars the terms and conditions relating to holidays, public holidays and holiday pay.
The particulars given in the contract must be sufficient to enable the employee's entitlement, including any entitlement to accrued holiday pay on termination, to be precisely calculated.
To ensure that employees fully understand their entitlements, employers would be well advised to include the provisions outlined below in this section of the contract.
The Holiday Year and Entitlement
The contract should specify the holiday year for all employees, ideally this should be a common holiday year so as to avoid the administrative difficulties of a holiday year running from the start of employment for each employee.
The minimum holiday entitlement for full-time employees is 28 days pursuant the Working Time Regulations 1998. There is no legal right to paid public holidays, or days off in lieu of public holidays. Accordingly, where employers wish to allow public holidays as leave, the contract should express a fixed number of days' holiday plus bank holidays, or alternatively a fixed number of holidays including bank holidays. The second provision is more favourable for part-time workers as this avoids issues arising where a bank holiday falls on the part-time workers normal working day. Part-Time workers should have their entitlement expressed as the pro-rata equivalent number of days.
It is advisable to include specific details for requesting and taking leave either within the contract or by reference to a specific policy or handbook provision.
If you wish to limit leave in the first year of employment it is advisable to include details of holiday accrual during the first year of service. Many employers include wording to provide for employees to only take holiday when it has accrued during the first year of service in line with the Working Time Regulations.
Statutory Leave (28 days of holiday) may only be taken in the leave year which it is due under the Working Time Regulations 1998 and there is no right to carry forward untaken leave into the next leave year. However, case law developments in relation to long term sickness and maternity absence provide for leave to be carried over to the next leave year if necessary and many employers also allow a limited amount of carry-over. It is advisable to confirm the number days allowed if carry-over is permitted and if not to provide for discretion to allow carry over in certain circumstances (e.g due to long term sickness or family friendly leave).
Most employment contracts are silent as to the exact calculation of a days' pay for the purposes of holiday pay. The main reason for this is that the law in relation to holiday pay has been in flux in recent years and as a result it is sensible to include the details of how holiday pay is calculated in a separate policy which can be changed more easily than individual contracts of employment.
In most cases for salaried employees holiday pay is straightforward to calculate. However, for employees receiving bonuses, commission, regular overtime payments, allowances or other payments which are intrinsic to the job duties these should ordinarily be averaged out and built into the holiday pay calculations (Bear Scotland Limited & Others -v- Fulton & Others & Lock v British Gas Trading). It is therefore advisable to include the mechanics of the holiday calculation within a separate annual leave policy document.
Holidays and Termination
Accrued statutory holiday cannot be paid in lieu, except on termination of employment. Only contractual leave in excess of the 28 day minimum entitlement can be paid in lieu during employment with the agreement of the employee.
On termination the Working Time Regulations provide for payment in lieu of accrued but untaken holiday. Wording can be inserted into the contract to limit this payment to accrued, but untaken, statutory holiday only. Additionally, you could provide for payment in lieu of excess contractual holiday, if it is to be paid at all to be subject to conditions. A provision here could for example exclude payment in lieu of excess contractual holiday where an employee resigns without due notice and/or where they are dismissed for gross misconduct.
It is also advisable to include provision for recovery of sums where the employee has taken in excess of their accrued leave entitlement at the time of termination, ordinarily this is expressed as a deduction from the final salary payment.
As an optional clause, many employers also including a clause which requires the employee to take any outstanding holiday entitlement during the employee's notice period so as to avoid having to make any payment in lieu on termination.
Next time we will be looking at termination provisions including notice, payment in lieu of notice and summary dismissal.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.