When someone’s employment with you ends, you must pay them for untaken holiday, how do you work out what they are owed?
When employees leave your business mid-year they are entitled to be paid for untaken holiday, but only the allowance that has accrued, not the full year’s amount. If they have taken more annual leave than they are entitled to, you may be able to claim this back, but only under certain conditions. Many employers and managers struggle to work out the correct figures, leading to frustration, or even paying the wrong amount. So what can you do to make sure you get it right?
Know the rules.
Holiday entitlements for staff leaving your organisation part-way through the holiday year are similar to those joining mid-year. The annual entitlements are set out by law, or your employment contracts, and staff are entitled to them pro-rata for part years. Broadly speaking, this means that if an employee leaves after half the year, they are entitled to be paid for half their holiday, minus any amount they have actually taken.
Sometimes, of course staff quit having taken more holiday than they have accrued, for instance leaving six months through the year having taken three quarters of their holiday. In this situation the employer can demand repayment of holiday pay (usually by deducting it from the employee’s final pay amount), but only if it is explicitly agreed in writing.
Written agreement to this is most often a clause in employees’ contracts, but might also be a one-off written agreement, for example as a condition of letting an employee take a long holiday early in the year. If there is no written agreement, then you will not legally be able to reclaim overpaid holiday pay, so it is important to check if one exists.
Learn the Calculation.
Pro-rata calculation means adjusting the yearly entitlement to take into account the amount of the year actually worked. You will need to know the employee’s entitlement, the dates of your companies holiday year, the employee’s leaving date, and how much holiday they have taken so far.
Let’s look at how this works for 3 employees.
XYZ Ltd gives staff the statutory allowance of 28 days’ holiday a year, the company’s holiday year runs from 1 January to 31 December. You may also need to know if there is a written agreement to reclaim overpayments.
Bob’s last day at XYZ is 30 September. He has taken 10 days’ holiday since 1 January. Having worked 9 months of the year, his holiday entitlement is 9/12 of the yearly amount, or 21 days. Bob’s final pay should therefore include 11 days’ extra pay to cover untaken holiday that he has accrued.
Alice is also leaving XYZ on 30 September. She has already taken 25 days’ holiday. Alice’s contract of employment states that XYZ can claim back overpaid holiday when employment ends. Alice’s final pay can therefore be reduced by 4 days’ pay to repay the overpaid holiday.
Harpreet is leaving XYZ on 30 September. Like Alice she has taken 25 days’ holiday, however there is no written agreement allowing the company to reclaim overpayments. Therefore, Hapreet’s final pay cannot be deducted, even though she has been overpaid for holiday.
Even once you know the rules on holiday for mid-year leavers, and know how to do the necessary calculations, working out pro-rata entitlements can still be fiddly and time-consuming. This is why so many businesses turn to leave management software to ease the load and put them in control of annual leave management.
LeaveWizard’s fully customisable integrated leave management platform makes it easy to keep track of your teams outstanding holiday entitlements, as well as offering automatic or custom reports to let you spot potential issues, or manage staffing requirements. See for yourself how LeaveWizard can save you time on pro-rata calculations and so much more by setting up your free, no-obligation online demo here