Token Sum for Holiday Pay on Termination Not Allowed

An employment tribunal has ruled that employment contracts cannot provide for a token payment to be paid to an employee in respect of untaken holiday on termination.

In Podlasiak v Edinburgh Woollen Mill Ltd, P was employed on a zero-hours contract which provided that she would be paid £1 in lieu of any untaken holiday on termination. When she left her employment she had three days untaken holiday, for which she would have been paid £176 net had she taken the holiday during employment. She was only paid £1 and she claimed that she had not been paid in lieu of her untaken leave, as required by the Working Time Regulations 1998 (“WTR”). 

The tribunal noted that under the WTR workers are entitled to be paid in lieu of untaken statutory holiday on termination. The amount of the payment may be the amount provided for in a relevant agreement, such as the employment contract, or otherwise the amount the worker would normally be paid. Whilst on a literal construction of the WTR, the employment contract could provide for a token payment, the WTR had to be construed in the light of the ECJ’s decision in Stringer. In that case, the ECJ said that pay in lieu of untaken holiday under the Working Time Directive has to reflect the normal pay the employee would have received had they taken leave during employment. The employment contract could not therefore only provide for a token payment.

Although the decision in this case is not binding as it is only at employment tribunal level, the question of whether employment contracts can provide for a token payment has always been a matter of debate. Some employers choose to include a provision for a token payment to be made where the employee is dismissed for gross misconduct as they do not consider that an employee guilty of misconduct should be paid for untaken holiday. 

The employment tribunal in this case relied on Stringer, a case dealing with holiday not taken because of sickness absence, to decide that in all cases (not just sickness cases) workers are entitled to pay in lieu of untaken holiday on termination at their normal rate and that provisions for token payments are unlawful. Employers whose contracts do provide for a token payment may legitimately wait for a decision of the Employment Appeal Tribunal before making changes but they should be aware of the risk of a challenge. 

Note that this decision only applies to statutory holiday. Employers may still provide in employment contracts that employees are not entitled to contractual holiday entitlement over and above statutory entitlement if, for example, they are dismissed for gross misconduct. 

If you would like to discuss your employment contracts in the light of this case, please contact Peter De Maria your usual Doyle Clayton contact.