How to calculate holiday pay on termination of employment (UK)

If you've recently had the unfortunate experience of terminating an employee's contract, you'll need to work out how much to pay them before they leave. One of the more complex aspects of this is calculating the employee's accrued holiday pay.

It's a legal requirement to provide holiday pay for any accrued holidays, up until the point of termination. However, the amount paid out depends on a number of factors. Here, we explain how to calculate holiday pay correctly on termination of employment.

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What are the rules on giving holiday pay on termination of contract?

What is my holiday entitlement when leaving a job?

Holiday entitlement for zero-hours contract termination

How much holiday pay is my employee entitled to?

What other aspects of final pay need to be calculated on employment termination?

Holiday pay on termination of employment FAQs

What are the rules on giving holiday pay on termination of contract?

Read more: How to calculate an employee's final pay

At the termination of a contract, an employee is legally entitled to any excess statutory holiday they have left, as part of their final payment. This is known as ‘pay in lieu of holiday', and is applicable both if the employee resigns or if you ask them to leave.

If you offer employees more than the statutory annual leave entitlement, an employee will only be entitled to pay from these extra days if it is stipulated in the contract.

If the contract does not mention that these days will be included, or there is no other agreement in place, the worker's pay need only include the statutory days.

Let’s look at an example to understand this more clearly. Suppose you offer 32 days of paid holiday per year, which includes the statutory minimum of 28 days and 4 additional contractual days.

An employee leaves at the end of the year, having only taken 25 days of holiday.

• You are legally required to pay in lieu for 3 days of unused statutory holiday (28 statutory days – 25 days taken = 3 days).

• Depending on the employee’s contract, you may also need to pay in lieu for the additional 4 contractual days, bringing the total to 7 days of holiday pay.

Read more: Can you pay an employee in lieu of annual leave?

What is my holiday entitlement when leaving a job?

The Working Time Regulations 1998 states that all workers are legally entitled to a minimum of 5.6 weeks' paid holiday a year.

To find out the total number of days, you should multiply this number by the number of days the employee usually works in a week. For full-time employees, the calculation looks like this:

• 5.6 weeks × 5 days per week = 28 days per year [including bank holidays]

An employee's entitlement to payment in lieu consists of any unused statutory leave they have left, up to the date the employment ends. This means if a full-time employee works six months before leaving, and takes ten days over that pay period, you would use the following calculation:

• 5.6 weeks × 5 days per week = 28 days per year [total annual entitlement]

• 28 days per year ÷ 2 = 14 days [entitlement for six months]

• 14 days [Total allowance] - 10 days [days taken] = 4 days

Therefore, the employee is entitled to four days' payment in lieu.

Holiday entitlement for zero-hours contract termination

Calculating holiday pay on termination of employment is different for employees on zero-hours contracts. It may be less clear how many days they're entitled to, because their working hours are, by definition, less predictable. In this instance, it's generally easier to calculate their entitlement by the number of hours worked.

Holiday for irregular hours workers and those on zero-hours contracts is accrued at a rate of 12.07% of the total hours worked in a year. For example, if an employee on a zero-hours contract worked 40 hours in a week, they would accrue five hours of leave, using the following calculation:

• 40 hours × 12.07% = 4.828 hours leave

• This then gets rounded up to five hours total, since it is more than 4.5.

If working out how much holiday someone is owed seems complicated, the Breathe holiday entitlement calculator tool can help you do the job 👇

How much holiday pay is my employee entitled to?

By now, we've worked out how many days' pay each employee is entitled to. Now, we'll explain how to calculate their pay for each of those days.

For salaried employees

If an employee is paid via monthly salary, you'll need to calculate a pay rate for each day. To do this, let's pretend an employee is paid £30,000 a year, and they have four unused holiday days to claim.

First, we convert the annual salary into a weekly figure:

• £30,000 [Salary] ÷ 52 [No. of weeks in the year] = £576.92

Then, we divide this by the number of days worked per week to find a daily figure. If the employee works full-time hours, this will be five days:

• £576.92 [Weekly pay] = 5 [No. of days worked per week] = £115.38

Then, we simply multiply this figure by the number of days' holiday the employee has unclaimed, in this case, four.

• £115.38 × 4 = £461.54

For part-time and zero-hours employees

When it comes to flexible and zero-hours workers, holiday pay calculations are relatively straightforward. This is because, by this stage, you should have already calculated the number of hours of leave the worker is entitled to.

To work out the holiday pay, simply multiply the number of leave hours accrued by their average hourly rate of pay.

What other aspects of final pay need to be calculated on employment termination?

Holiday entitlement is not the only consideration when terminating an employee's contract. You also need to make sure you calculate the following.

Wages or pay in lieu of notice

The employee is legally entitled to be paid until the end of their notice period. If you would prefer they don't work their notice period, you should pay them as if you were going to anyway. This is known as pay in lieu of notice.

There are two main exceptions to this rule:

• If both you and the employee mutually agree to forego the notice period. In this case, you will only pay the employee for the days worked.

• If the employee breaks their contract by refusing to work the notice period. In this case, you are not required to pay them for the unworked notice period, though you will still have to pay unused holiday pay.

Redundancy payments

If the employee has been affected by redundancy, they may be entitled to statutory or contractual redundancy payments.

If you don't offer a contractual redundancy pay scheme, an employee may still be entitled to statutory redundancy pay, provided they have completed at least two years of continuous service with your organisation.

If you're unsure about statutory redundancy pay, here is something worth remembering: Statutory redundancy pay is determined by the age of the employee and the length of their employment from the dismissal date.

• 18-22: Half a week's pay for each full year of employment

• 22-40: One week's pay for each full year of employment

• 41+: 1.5 weeks' pay for each full year of employment.

You can quickly work out how much an employee is owed for redundancy using the Breathe redundancy calculator tool 👇

Simple, stress-free holiday management with Breathe

Of course, all of this is much easier to work out if you have a clear and straightforward log of holiday allowance and days taken. That's where Breathe comes in, allowing you to:

• Offer a single centralised interface for employees to request holiday and for managers to grant it.

• Make the most of our productivity-boosting features, such as setting holiday ‘blackout' dates so your team knows when not to take leave.

• Set statutory holidays for multiple employees at the same time and easily filter time off by department, so everyone can be kept in the loop.

Get more done in less time with Breathe. Start your 14-day free trial today and see how much time you could save.

Holiday pay on termination of employment FAQs

How to avoid any issues with final pay

To avoid any issues with final pay, make it clear in the payslip what each payment or deduction is for. This will give the employee a chance to check the figures to make sure the sums are correct.

If the employee is unhappy with their final pay, or there are any discrepancies, try to resolve this on an informal basis first. If it goes further to legal action, it can start to get costly.

Do employees get holiday pay if sacked?

Even if an employee is dismissed for misconduct or gross misconduct, they are still entitled to be paid for any untaken statutory holiday entitlement. They should also usually be entitled to their normal wages up until their final day of employment, or pay in lieu of notice.

Do employees get holiday pay if they leave without notice?

Employees usually do still get paid for unused holiday days, even if they leave without notice. The amount of holiday pay given is dependent on the amount of holidays accrued and taken up until the point they leave. In this case, however, the employee is not entitled to be paid for the unworked notice period.

Do employees get paid for unused holidays when they leave?

An employer has to pay an employee for any holiday allowance they are legally entitled to, even if those holidays haven't been taken.