We've all been there: a valued employee knocks on your office door, asks for a "chat", shuts the door behind them and hands in their notice. They say they're sorry, but a great opportunity has come along that they simply can't turn down. Your stomach sinks and you're gutted to be losing a great member of the team.

Let's face it, it's never nice when an employee tells you they're leaving.

But, as their employer, you'll need to be 100% transparent with the employee and let them know what they're entitled to during their notice period. And one thing you'll need to clear up is their holiday entitlement - quite often employees choose to take their remaining allowance during their notice period. 

Let's look at how this works. 

Taking annual leave in notice periods

During their notice period, an employee is able to take whatever is left of their statutory annual leave.

But it's how much holiday they've accrued each month that matters here. And this is dependent on how much of the holiday year has passed – for example, they won’t be able to use up their full years’ worth of allowance if the holiday year only started 3 months ago.

An employee’s holiday entitlement begins to accrue from their first day of employment and accrues monthly in relation to their annual leave entitlement. 

For example, if your holiday year runs from January to December and the employee leaves in April, they will have accrued 4/12ths of their holiday entitlement. Based on an annual leave allowance of 25 days (the average annual leave allowance for UK workers according to our research), this means they are entitled to have taken 8.3 days of holiday.

If the employee hasn’t yet taken their full annual leave entitlement, then they’re free to do so during their notice period, should they want to. The employer can only refuse this request for annual leave for valid business reasons - anything else could be seen as discriminatory.

Equally, you as the employer have the right to ensure the employee uses up their annual leave during their notice period. Working Time Regulations allow employers to specify the dates on which an employee must take some, or all, of their annual leave. In order to do this, you must give the employee notice - this should be at least double the number of leave days you want the employee to take. For example, if the employee has 4 days of holiday remaining, you must give the employee at least 8 days’ notice.

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What happens if an employee takes more leave than they’ve accrued?

If the employee has taken more leave than they are entitled to in the current holiday year, you as their employer can make a deduction from their final pay, equivalent to the additional leave days taken. However, this must be agreed beforehand by the employee and put in writing. The rules surrounding this should be outlined in an employment contract or handbook.

Payment in lieu of holiday in notice period

If the employee doesn’t wish to use up their remaining annual leave entitlement in their notice period, or they're not able to, then you must provide payment in lieu for any holiday days that they've accrued but not taken.

Calculating holiday pay on termination of employment

If the employee chooses to be paid for any holiday they haven't taken, you'll need to know how to calculate what you owe them. 

Here’s the magic formula you’ll need to figure this out:

(A x B) - C
  • A is the total number of days’ holiday the employee is entitled to in a year
  • B is the fraction of the year to the date of leaving (month of the year ÷ 12)
  • C is the amount of holiday already taken this year

Let’s put this into action and look at an example:

  • Sean works 5 days a week and is entitled to 5.6 weeks’ paid annual leave. He hands in his notice and leaves in April, 4 months into the year, having already taken 9 days of annual leave. This is the equivalent of 1.8 weeks (9 days ÷ 5 working days per week).

By applying the formula above, we get the following sum:

 5.6 weeks x (4 months ÷ 12 months) - 1.8 weeks
= 0.067 weeks’ leave to be paid in lieu.

Note: When the formula gives you a decimal, it’s usually recommended that you round the number up rather than down to avoid underpayment (and an unhappy employee).

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