Handling Unused Holiday Allowance Upon Employee Departure
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When an employee leaves your company, there is a good chance that they have saved up some of their annual leave that they have not yet used.
What happens to this untaken vacation? Is the amount of holiday pay affected? And what happens if the employee leaves voluntarily, is laid off or loses his job?
Below is a brief guide to what happens to unused vacation days when an employee leaves work. (If you are an employee yourself, this may also be useful for you).
How does holiday compensation work when you leave the company?
When someone leaves employment, the final salary usually consists of the working hours for the last month, plus appropriate severance pay and remaining vacation.
When leaving the company, the employer must pay out the corresponding number of remaining vacation days. So if there are 3 unused vacation days, this means compensation for 3 days. Very easy. This is called compensation for vacation.
But the opposite is also possible. If, for some reason, the employee took more vacation than he accrued, the company may deduct the corresponding amount from his final salary. (This can happen if annual leave is not well organized in the company - and we have just the right solution for that).
The above statements only apply to the statutory holiday entitlement (the statutory minimum). As a reminder of how statutory annual leave works: In the UK, every full-time employee is entitled to 28 days of annual leave per holiday year, including days off on public holidays.
It may well be more if the company grants a higher annual vacation entitlement as part of the employment contract.
Calculation of the last vacation pay when leaving the company
There is a simple formula you can use to calculate how much vacation pay your employee will receive.
It is: (A x B) - C, where:
- A is the vacation entitlement for the entire vacation year in days
- B is the proportion of the year that has already passed at the time of the exit
- C is the number of vacation days already taken
Let's say Jeff leaves the company on April 30th. He worked a regular five-day week from 9 a.m. to 5 p.m. He receives the usual statutory holiday entitlement of 28 days per year and has already used six days of holiday by the end of his notice period.
B would be 4/12 or 33% since a third of the year has passed:
(28 x 0.33) - 6 = 3.24
You can round that up to 3.5. So Jeff receives three and a half days of vacation pay.
Do you have to pay the last vacation pay if you fire an employee?
The simple answer is: yes, you must. Even if it is a dismissal for gross misconduct, the law requires you to pay the contractually agreed holiday pay to which the employee is entitled.
The date up to which vacation pay is calculated is the date on which the employee is terminated. This is the end of the notice period that you have given the employee. If this is an on-site layoff where you send the employee home that day, this is the day by which you must calculate vacation pay.
What else affects the final vacation pay?
If the employee wants to take vacation during the notice period, that shouldn't be a problem. Treat the notice period like normal working hours and simply deduct the days from the final vacation pay. For more detailed information, see our guide to holiday entitlement during the notice period.
However, if the employee decides to leave their job without giving the correct notice period, this could be in breach of their employment contract. In this case, if the contract contains clauses about wage deductions, you must implement them.
There is also a case of sick leave during the notice period. However, that is a different issue - employees should have the same right to sick pay during this period as during the normal working week.
The dismissal should also not affect the final vacation pay. It should simply be in addition to any other severance pay you pay as part of the redundancy package.
If you need further guidance on calculating holiday pay for your employees, read our holiday entitlement calculator.
Gov.UK is also a very good source. Their guide to calculating holiday pay for employees with irregular working hours can be very helpful (or you can read our simple explanations of how to calculate holiday pay).
Managing unused holiday allowance when employees leave is crucial for both legal compliance and fair treatment. IceHrm offers tools to streamline this process, ensuring smooth transitions.
