Holiday Entitlement When Leaving a Job in 2026

Holiday entitlement when an employee leaves a job is one of the most common causes of payroll disputes, unlawful deduction claims and avoidable employment tribunal exposure. For employers, errors in final holiday calculations rarely arise from complex law; they arise from poor interpretation of statutory rules, inconsistent application of contractual terms or a failure to treat holiday pay as a legal compliance issue rather than an administrative task. For background on the pay mechanics and risk areas that commonly trigger disputes, see holiday pay and final pay when leaving a job.

Final holiday entitlement is governed primarily by the Working Time Regulations 1998, but it also engages wider risk areas including the Employment Rights Act 1996, National Minimum Wage compliance and reputational exposure where exit processes are handled poorly. Employers who treat holiday calculations casually at termination often discover that small errors escalate quickly into formal grievances, ACAS early conciliation or tribunal claims that cost significantly more to defend than the value of the holiday pay itself.

What this article is about
This article explains how UK employers must determine holiday entitlement when an employee leaves a job, focusing on defensible, audit-ready decision-making rather than basic explanation. It sets out what the law requires, how entitlement must be calculated in practice and where employers are most exposed to risk if they get it wrong. The guide covers statutory and contractual holiday entitlement, pro-rata accrual, bank holidays, holiday pay calculation, deductions for overtaken leave and the interaction with notice periods, garden leave and payment in lieu of notice.

The emphasis throughout is on compliance-first employer decision-making: what HR and payroll teams must do, what choices employers need to make and what the legal and commercial consequences are when mistakes occur.

Section A: What holiday entitlement does an employee have when they leave a job?

When an employee leaves employment, the starting point is to identify exactly what holiday entitlement exists at the termination date. This is not a single figure and cannot be assumed. Employers must separate statutory entitlement from contractual entitlement and apply the correct rules to each. Failure to do so is one of the most common causes of underpayment and unlawful deduction claims.

From a legal perspective, entitlement on exit is determined by three core factors:

• Statutory annual leave under the Working Time Regulations 1998
• Any contractual holiday entitlement above the statutory minimum
• The structure of the employer’s leave year and accrual method

Each must be assessed before any calculation is attempted.

1. Statutory holiday entitlement on termination

Under the Working Time Regulations 1998, almost all UK workers are entitled to 5.6 weeks’ paid annual leave per leave year. This statutory entitlement is made up of 4 weeks’ leave derived from EU law and an additional 1.6 weeks provided under domestic UK legislation. For wider context on statutory entitlement and how it operates across different working patterns, see holiday entitlement.

When employment ends part-way through a leave year, the employee is entitled to the proportion of this statutory leave that has accrued up to the termination date, less any statutory holiday already taken. Regulation 14 of the Working Time Regulations requires employers to calculate and make a payment in lieu of any accrued but untaken statutory holiday at termination. Even where internal policies use simplified accrual methods during employment, the final entitlement on termination must not fall below the statutory minimum that is payable under Regulation 14. If it does, the employer is exposed to an unlawful deduction of wages claim.

Employers must understand that statutory holiday entitlement cannot be waived, capped or replaced by contractual wording. Even where internal policies use simplified accrual methods during employment, the statutory minimum payable at termination must still be met.

2. Contractual holiday entitlement above the statutory minimum

Many employers offer holiday entitlement in excess of the statutory minimum. This additional entitlement exists solely by virtue of the contract of employment and must be interpreted strictly in accordance with its wording.

Contractual holiday may accrue proportionately for starters and leavers or be limited by express terms that restrict accrual or payment on termination. The key compliance risk for employers is assuming that enhanced contractual leave is treated differently from statutory leave without having clear contractual authority to do so. Where the contract is silent or ambiguous, tribunals commonly interpret entitlement in the employee’s favour.

From a governance perspective, employers should ensure contractual terms are supported by an up-to-date policy framework and operational process. Where your business relies on a written holiday framework for consistent decision-making, see annual leave policy.

3. Bank holidays and entitlement on exit

There is no statutory right to paid bank holidays. Whether bank holidays form part of an employee’s entitlement depends entirely on the contract. Common formulations include “5.6 weeks’ holiday including bank holidays” and “5.6 weeks’ holiday plus 8 paid bank holidays”. These formulations produce very different outcomes on termination. Where bank holidays are included within the overall entitlement, they are subject to pro-rata accrual and deduction in the same way as other leave.

Where bank holidays are provided in addition to statutory holiday, they are a contractual benefit. In the absence of clear wording to the contrary, contractual benefits are generally assumed to accrue proportionately. Employers who intend to exclude bank holidays from pro-rata accrual on termination must state this explicitly in the contract. Silence or ambiguity is usually interpreted in the employee’s favour.

Employers who fail to distinguish properly between these arrangements often miscalculate entitlement, particularly where bank holidays have been taken early in the leave year.

Employer decision points and risk exposure

At this stage, employers must make three clear decisions:

• What portion of the employee’s entitlement is statutory and protected by law
• What portion is contractual and governed by the contract wording
• How bank holidays are treated under the contractual framework

If these decisions are not made correctly at the outset, any subsequent calculation is likely to be flawed. The legal risk is not limited to underpayment. Incorrect classification can result in inconsistent treatment across leavers, increasing the likelihood of challenge and reputational damage.

Section A summary
When an employee leaves a job, holiday entitlement must be identified before it is calculated. Employers must distinguish statutory entitlement under the Working Time Regulations from contractual enhancements and apply the correct rules to each. Bank holidays must be treated strictly in line with contract wording, and assumptions are a frequent source of error. Getting this stage wrong exposes employers to unlawful deduction claims and avoidable disputes, regardless of how carefully the final figures are calculated.

Section B: How must employers calculate holiday entitlement for leavers?

Once an employer has identified what holiday entitlement applies, the next step is to calculate how much of that entitlement has accrued by the leaving date. This is where most compliance failures occur. Employers often rely on payroll shortcuts or informal accrual methods without checking whether the final figure meets statutory requirements. At termination, this approach is risky. The law imposes a clear benchmark, and employers must ensure their calculation does not fall below it. For a practical overview of common calculation pitfalls and employer obligations, see holiday pay on termination of employment.

Holiday entitlement for leavers is not calculated on a discretionary or “reasonable” basis. It is a legal calculation governed by the Working Time Regulations 1998 and, where applicable, the employee’s contract. Employers must therefore be able to explain not only the outcome but the method used to reach it.

1. How does statutory holiday accrue up to the leaving date?

Statutory annual leave accrues proportionately throughout the leave year. When an employee leaves part-way through that year, Regulation 14 of the Working Time Regulations 1998 requires employers to calculate the statutory minimum entitlement payable at termination and to make a payment in lieu for any accrued statutory leave that has not been taken. While employers can use internal accrual methods during employment, the final termination calculation must not undercut the statutory minimum that is payable under Regulation 14.

In practice, this means that whatever method the employer uses, the final figure should be checked against the statutory pro-rata entitlement calculated by reference to the proportion of the leave year worked. Where the workforce includes atypical working patterns, employers should ensure that the underlying entitlement rules have been applied correctly before running the numbers. For wider context on statutory entitlement rules, see holiday entitlement.

2. Which accrual methods are lawful and defensible?

There is no single mandatory method for calculating accrued holiday for leavers, but not all methods are equally robust from a risk perspective. The most commonly used approaches are:

• Monthly accrual, typically calculated as full annual entitlement divided by 12, multiplied by the number of complete months worked
• Calendar-day accrual, which calculates entitlement by reference to the exact number of days worked in the leave year
• Hours-based accrual, used primarily for irregular hours or part-year workers under the post-April 2024 statutory framework

Monthly accrual is widely used because it is simple and predictable. However, it can produce inaccuracies where employment ends mid-month. In those cases, employers should either apply a clear contractual rounding rule or use a calendar-day calculation to ensure the statutory minimum is met.

Calendar-day accrual is often the most defensible method for leavers because it aligns closely with a proportional statutory approach. It reduces the risk of challenge where the termination date falls early or late in a month and is particularly useful where precise calculations are required.

For irregular hours and part-year workers, legislative reforms effective from April 2024 introduced a statutory framework allowing holiday entitlement to be calculated as a percentage of hours worked. Employers may use a percentage-based accrual equivalent to 12.07% of hours worked in each pay period, provided the worker falls within the statutory definitions and the leave year begins on or after 1 April 2024. Transitional rules apply where leave years straddle that date. Employers should ensure they apply this method only where permitted and that payroll systems are aligned with the revised rules. For further guidance on these categories, see irregular hours holiday pay and holiday entitlement for irregular hours.

3. How should mid-month leavers be handled?

Mid-month terminations are a frequent source of dispute. Employers who simply round entitlement down to the nearest month without contractual authority risk underpaying statutory holiday. The law does not permit employers to round in a way that reduces the statutory minimum entitlement.

Where an employee leaves mid-month, employers must decide whether the contract allows rounding or whether a more precise calculation is required to avoid breaching statutory entitlement. In the absence of clear contractual wording, a calendar-day calculation is usually the safest approach. This ensures the employee receives the correct proportion of statutory holiday accrued and reduces arguments that the employer has arbitrarily reduced entitlement.

From a risk management perspective, consistency matters. Employers should apply the same method to all leavers unless there is a clear, lawful reason to do otherwise. Inconsistent treatment increases the likelihood of challenge and undermines the employer’s ability to defend its approach.

4. What about accrual during sickness and family leave?

Statutory holiday continues to accrue during periods of sickness absence, maternity leave and other forms of family leave. Employers must factor this into their calculation where a leaver has been absent for part or all of the leave year. This is an area where employers often make mistakes by assuming that long-term absence limits entitlement. It does not.

Where an employee has been unable to take the first four weeks of statutory leave due to long-term sickness or maternity leave, that leave must be allowed to carry over. On termination, any accrued but untaken statutory leave must be paid in lieu, even if it relates to a previous leave year. Employers should ensure they are applying the correct carry-over and sickness interaction rules, particularly where the employee’s absence spans leave years. For related guidance, see holiday, sickness and leave and annual leave carry over.

Section B summary
Holiday entitlement for leavers must be calculated using a method that meets or exceeds statutory requirements. Employers may use different accrual methods, but the final figure must always be checked against the statutory minimum entitlement payable at termination. Mid-month terminations, long-term absence and irregular working patterns are common pressure points where errors occur. Employers who apply clear, documented and consistent calculation methods are far better placed to defend their decisions and avoid disputes at termination.

Section C: How should bank holidays and contractual leave be treated on exit?

Bank holidays and enhanced contractual leave are two of the most common sources of disagreement when an employee leaves a job. Employers often assume these elements are discretionary or can be excluded from final calculations without consequence. In reality, the treatment of bank holidays and contractual leave on exit depends entirely on contract wording and consistent application. Getting this wrong frequently leads to overpayment or underpayment and exposes employers to avoidable legal risk.

The legal position is straightforward in principle but unforgiving in practice: there is no statutory right to paid bank holidays, and any entitlement beyond the statutory minimum exists only if the contract provides for it. Employers must therefore interpret and apply contractual provisions precisely. For broader context on how bank holidays interact with annual leave, see bank holidays and annual leave.

1. Are bank holidays included in holiday entitlement when someone leaves?

Whether bank holidays are included in an employee’s holiday entitlement on exit depends entirely on how the contract defines annual leave. Common contractual formulations include “5.6 weeks’ holiday including bank holidays” and “5.6 weeks’ holiday plus 8 paid bank holidays”. These approaches have materially different consequences.

Where bank holidays are included within the total annual entitlement, they form part of the overall leave allowance and accrue proportionately for starters and leavers. Any bank holidays already taken during the leave year must be deducted from the accrued entitlement when calculating what remains payable on exit.

Where bank holidays are provided in addition to statutory holiday, they are a contractual benefit. In the absence of clear wording to the contrary, contractual benefits are generally assumed to accrue proportionately. Employers who intend to exclude bank holidays from pro-rata accrual on termination must state this explicitly in the contract. Silence or ambiguity is usually interpreted in the employee’s favour.

2. What happens if bank holidays fall after the leaving date?

Employees are not entitled to bank holidays that fall after their employment has ended unless the contract provides a fixed entitlement regardless of the leaving date. This is a common area of misunderstanding.

Where the contract provides an annual entitlement that includes or adds bank holidays, entitlement accrues only up to the termination date. Bank holidays occurring after that date do not generate additional entitlement. Employers should resist assumptions that all bank holidays in the leave year are automatically payable. For related employer discretion issues, see employer refusing holiday requests.

3. How should enhanced contractual leave be treated on termination?

Contractual holiday entitlement above the statutory minimum must be treated strictly in accordance with the contract. Employers often assume they can limit payment in lieu to statutory leave only. That assumption is lawful only if the contract clearly provides for it.

If the contract explicitly limits payment in lieu to statutory holiday, the employer may rely on that limitation. If the contract is silent or ambiguous, tribunals are likely to require payment in lieu for accrued contractual leave as well. This is an area where poorly drafted contracts create significant cost exposure.

Employers should also be alert to inconsistencies between contracts, staff handbooks and holiday policies. Where documents conflict, employees may argue for the interpretation that produces the greatest entitlement. From a policy and drafting perspective, see annual leave policy.

4. What about rounding rules and contractual discretion?

Some contracts include rounding provisions or discretionary language around holiday entitlement. While employers may rely on these provisions in relation to contractual leave, they cannot apply them in a way that reduces statutory entitlement.

Rounding down accrued leave is lawful only if the contract expressly permits it and the result does not reduce the employee’s statutory minimum entitlement. Where these conditions are not met, rounding presents a real legal risk. Employers who rely on informal rounding practices without contractual support are particularly vulnerable to challenge.

Employer decision points and risk exposure

At this stage, employers must make clear decisions on:

• whether bank holidays are included within or added to annual leave
• whether contractual leave accrues proportionately for leavers
• whether any contractual limitations on payment in lieu apply

If these decisions are made incorrectly, the financial impact is often immediate, but the broader risk is reputational and procedural. Disputes over final holiday entitlement frequently escalate because employees perceive the treatment as unfair or arbitrary, even where the sums involved are modest.

Section C summary
Bank holidays and contractual leave must be treated strictly in line with contract wording when an employee leaves a job. There is no statutory entitlement to paid bank holidays, and enhanced contractual leave is payable on termination only to the extent the contract provides for it. Ambiguity is routinely resolved in the employee’s favour. Employers who want certainty must ensure their contracts and policies are clear and that final holiday calculations are consistent and defensible.

Section D: How must holiday pay be calculated in final pay?

Once accrued holiday entitlement has been identified and calculated, employers must determine how much the employee must be paid for that leave in their final pay. This is a separate legal question from how much leave has accrued. Employers frequently make mistakes at this stage by applying basic salary rates or simplified payroll assumptions that do not reflect statutory holiday pay requirements.

Holiday pay on termination is governed by the Working Time Regulations 1998 and a substantial body of case law. Employers must treat holiday pay as a statutory right intended to mirror what the employee would have earned had they taken the leave during employment, not as a discretionary or reduced payment. For a wider overview of how holiday pay should be calculated across different scenarios, see holiday pay.

1. What rate of pay must be used for holiday pay on exit?

Statutory holiday pay must be calculated by reference to the employee’s normal remuneration. This principle has been established through case law, including Lock v British Gas and Bear Scotland v Fulton, and is now embedded in UK employment law.

Normal remuneration is not limited to basic pay. It includes any elements of pay that are paid regularly and are intrinsically linked to the performance of the employee’s duties. Depending on the role, this may include commission, regular overtime, shift premiums, standby payments and allowances. Employers who exclude these elements from holiday pay calculations risk underpaying statutory holiday, which constitutes an unlawful deduction of wages. For common problem areas, see holiday pay on overtime.

The obligation to reflect normal remuneration applies equally at termination. Employers cannot simplify holiday pay by paying basic salary only in final pay unless that genuinely reflects the employee’s normal earnings.

2. How does the 52-week reference period apply for leavers?

For employees with variable pay, employers must calculate statutory holiday pay using the 52-week reference period, based on paid weeks only. Weeks in which the employee received no pay must be excluded. If there are fewer than 52 paid weeks available, employers must look back further, up to a maximum of 104 weeks, to identify the required number of paid weeks.

This averaging mechanism applies to statutory holiday pay, including payments in lieu on termination. Employers must ensure payroll systems correctly identify paid weeks and exclude unpaid periods such as unpaid leave or certain sickness absences. Errors in applying the reference period are a frequent cause of underpayment, particularly for workers with fluctuating hours or earnings.

3. Does the holiday pay rate differ between statutory and contractual leave?

Statutory holiday pay must reflect normal remuneration. Contractual holiday pay, by contrast, depends on the terms of the contract. Some employers choose to pay contractual leave at basic pay only, while others apply the same pay rate to all holiday.

Where contractual holiday is paid at a different rate from statutory holiday, employers must be able to identify clearly which days of leave are statutory and which are contractual. This distinction must be applied consistently and transparently. In practice, many employers avoid complexity by paying all holiday at the statutory rate. While not legally required, this approach significantly reduces the risk of miscalculation and dispute.

4. How should holiday pay be presented in final payslips?

Transparency in final pay is an important risk management tool. Holiday pay should be clearly itemised on the employee’s final payslip as a payment in lieu of holiday, rather than being rolled into a single termination payment figure.

Clear itemisation helps demonstrate compliance with the Working Time Regulations, allows employees to understand how their final pay has been calculated and reduces the likelihood of disputes escalating into formal claims. Employers should retain a clear calculation breakdown showing how the holiday pay figure was derived, including reference periods and pay elements included.

Employer decision points and compliance risk

At this stage, employers must decide:

• which elements of pay form part of normal remuneration
• how the 52-week reference period is applied
• whether contractual holiday is paid at the same rate as statutory holiday

Errors in holiday pay calculation frequently lead to claims that extend beyond the individual leaver. Where underpayment affects multiple employees, employers may face group claims or systemic payroll corrections, significantly increasing cost and exposure.

Section D summary
Holiday pay on termination must reflect the employee’s normal remuneration and comply with statutory averaging rules for variable pay. Employers who calculate entitlement correctly but apply the wrong pay rate remain exposed to unlawful deduction claims. Clear systems, accurate payroll data and transparent payslip itemisation are essential to ensure final holiday payments are lawful and defensible.

Section E: Can employers deduct overtaken holiday from final salary?

A common issue at termination arises where an employee has taken more holiday than they have accrued at the point they leave. Employers often assume they can simply deduct the excess from final pay. In law, that assumption is unsafe. Deductions from wages are tightly regulated, and employers who recover overtaken holiday without proper authority expose themselves to automatic liability for unlawful deduction claims.

The legal framework governing deductions is strict and leaves little room for discretion. Employers must therefore treat overtaken holiday as a wage deduction risk, not a routine payroll adjustment. For wider context on how holiday overpayments and pay issues are treated, see holiday pay.

1. When is a deduction for overtaken holiday lawful?

The Employment Rights Act 1996 provides that an employer may not make deductions from wages unless one of the following applies:

• the deduction is required or authorised by statute
• the deduction is expressly authorised by the contract of employment
• the employee has given prior written consent to the deduction

There is no general statutory right to recover overtaken holiday. In practice, this means employers may deduct pay for holiday taken in excess only if the contract clearly permits it or the employee has agreed in writing before the deduction is made. Where the contract is silent, implied consent is not sufficient. Employers who deduct without clear authority are highly likely to face an unlawful deduction of wages claim, regardless of whether the employee has objectively been overpaid.

2. What must a valid contractual deduction clause include?

For a deduction clause to be enforceable, it must be clear and unambiguous. A robust clause will typically state that the employer may recover from final salary the value of any holiday taken in excess of accrued entitlement at the termination date.

Vague wording or general references to “overpayments” may not be sufficient, particularly where holiday entitlement is involved. Tribunals tend to interpret deduction clauses narrowly, and any ambiguity is likely to be resolved in the employee’s favour. Employers should not assume existing contracts contain adequate authority, as many standard templates do not.

3. How does the National Minimum Wage affect deductions?

Even where a contractual deduction clause exists, employers must consider the interaction with National Minimum Wage legislation. Deductions made from pay can, in certain circumstances, reduce the worker’s pay for a pay reference period below the applicable minimum wage rate.

While deductions for overtaken holiday are not typically treated as deductions made for the employer’s own use or benefit, the National Minimum Wage position can be fact-specific and should be checked carefully against HMRC guidance in each case. Employers who breach minimum wage rules risk enforcement action, financial penalties and reputational exposure.

4. When should employers calculate and communicate overtaken holiday?

Timing and communication are critical. Employers should calculate any overtaken holiday as early as possible during the notice period and notify the employee in writing of:

• the amount of leave taken in excess
• the proposed deduction
• the contractual basis for recovery

This approach reduces the risk of dispute and demonstrates transparency. Employers who wait until the final payslip to reveal a deduction often face grievances or claims driven as much by process failure as by legal entitlement.

Where there is no contractual authority to deduct, employers must decide whether to waive recovery or seek repayment separately by agreement. Attempting to recover the amount unilaterally without authority is almost always the highest-risk option.

Employer decision points and risk exposure

At this stage, employers must decide:

• whether contractual authority to deduct exists
• whether National Minimum Wage compliance is affected
• how and when the deduction will be communicated

The consequences of getting this wrong are immediate. An unlawful deduction claim does not require the employee to show loss or unfairness. Liability arises simply because the deduction was not authorised.

Section E summary
Employers may recover overtaken holiday from final salary only where there is clear contractual authority or prior written consent. Deductions made without authority are unlawful, even where the employee has objectively been overpaid. National Minimum Wage compliance must also be considered, and early, transparent communication is essential to reduce dispute risk.

Section F: How do notice periods, garden leave and PILON affect holiday entitlement?

Holiday entitlement does not stop accruing simply because an employee has resigned or been dismissed. How entitlement is treated during the notice period, and how termination is effected, has a direct impact on how much holiday accrues and what must be paid on exit. Employers frequently make mistakes here by assuming that once notice is given, entitlement freezes. That assumption is wrong and creates avoidable legal exposure.

The interaction between holiday entitlement, notice, garden leave and payment in lieu of notice (PILON) is governed by the Working Time Regulations 1998, the Employment Rights Act 1996 and the terms of the employment contract. Employers must understand how these elements operate together to avoid underpaying holiday or inadvertently extending entitlement. For related pay and notice mechanics, see holiday pay.

1. Does holiday continue to accrue during the notice period?

Yes. Statutory holiday entitlement continues to accrue throughout the notice period, regardless of whether the employee is working, absent due to sickness or on garden leave. The fact that an employee is serving notice does not reduce or suspend statutory holiday rights.

Employers must therefore include the notice period when calculating accrued holiday up to the termination date. Failing to do so is a common source of underpayment and unlawful deduction claims.

Contractual holiday entitlement may also accrue during the notice period, depending on the wording of the contract. Where the contract is silent, the safer assumption is that contractual leave accrues in the same way as statutory leave.

2. Can employers require employees to take holiday during notice?

Employers may require employees to take statutory annual leave during their notice period, provided they give the correct notice. Under the Working Time Regulations, the employer must give notice that is at least twice the length of the holiday the employee is required to take.

This mechanism is often used to reduce the amount of holiday payable on termination. However, it must be exercised lawfully and reasonably. Employers should ensure:

• the correct statutory notice is given
• the requirement is communicated clearly in writing
• any contractual rules governing holiday during notice are followed

Failure to give proper notice renders the requirement ineffective, meaning the holiday remains payable on exit.

3. How does garden leave affect holiday entitlement?

An employee on garden leave remains employed until the termination date. As a result, statutory holiday continues to accrue throughout the garden leave period.

Garden leave does not automatically extinguish holiday entitlement. Employers sometimes assume that because an employee is not attending work, holiday is effectively being taken. That assumption is incorrect unless the employer has expressly designated periods of garden leave as holiday and complied with the statutory notice requirements for requiring holiday.

Contractual holiday entitlement may or may not accrue during garden leave, depending on the wording of the contract. Employers should review garden leave clauses carefully and avoid assumptions that enhanced leave ceases automatically.

4. How does payment in lieu of notice (PILON) affect holiday accrual?

The effect of PILON on holiday entitlement depends critically on whether the employer has a contractual PILON clause.

Where the contract contains a valid PILON clause and the employer exercises it, employment terminates immediately. In that situation, statutory holiday accrual stops on the termination date and no further holiday accrues during the notional notice period.

Where there is no PILON clause and the employer nonetheless pays in lieu of notice, the payment is usually treated as damages for wrongful dismissal rather than contractual pay. In this scenario, the contract may be treated as continuing for the length of the statutory or contractual notice period, meaning statutory holiday may continue to accrue during the notional notice period. This distinction can materially increase an employer’s holiday pay liability and is frequently misunderstood.

Most employers include PILON clauses specifically to avoid this complexity and risk.

Employer decision points and compliance risk

At this stage, employers must decide:

• whether to require holiday to be taken during notice
• whether garden leave will include designated holiday periods
• whether a PILON clause exists and has been exercised correctly

Mistakes in this area often lead to unintended accrual of additional holiday or unlawful attempts to withhold holiday pay. From a risk management perspective, notice and termination mechanics should always be reviewed alongside holiday entitlement, not treated as separate processes.

Section F summary
Holiday entitlement continues to accrue during notice and garden leave, and employers must account for this when calculating final entitlement. Requiring holiday during notice is lawful only if correct notice is given. The presence or absence of a contractual PILON clause can significantly affect holiday accrual. Employers who misunderstand these interactions often underpay holiday on exit or inadvertently increase their liability.

Section G: What HR processes protect employers from holiday entitlement disputes?

Most disputes about holiday entitlement when an employee leaves do not arise because the law is unclear. They arise because employers lack consistent processes, rely on informal practices or fail to document decisions properly. From a risk management perspective, final holiday calculations should be treated as a controlled HR and payroll process, not an ad hoc task triggered at resignation.

Employers who can demonstrate clear systems, consistent application and transparent communication are far better placed to defend claims, resolve disputes quickly and avoid escalation to tribunal proceedings.

1. What should employment contracts and policies cover?

The first line of defence against disputes is clear contractual drafting. Employment contracts should specify, in plain terms:

• the total annual holiday entitlement
• whether bank holidays are included or additional
• the leave year dates
• how entitlement accrues for starters and leavers
• whether enhanced contractual leave accrues proportionately
• whether payment in lieu of contractual leave is permitted
• whether deductions for overtaken holiday may be made

Holiday policies and staff handbooks should align with contractual terms. Where policies add operational detail, they must not contradict the contract. Inconsistencies between documents are frequently relied upon by employees to argue for a more generous interpretation of entitlement. Employers should ensure that written policies remain aligned with current legal requirements and operational practice, including the post-April 2024 rules affecting irregular hours and part-year workers.

2. How should HR and payroll manage calculations?

Accurate calculations depend on reliable data. Employers should ensure HR and payroll systems maintain clear records of:

• annual leave entitlement by leave year
• holiday taken and dates taken
• the accrual method applied
• working patterns and hours
• variable pay elements relevant to holiday pay calculations

For leavers, HR and payroll should produce a clear calculation breakdown showing accrued entitlement to the leaving date, leave taken, leave remaining or overtaken and the pay rate applied. This breakdown should be retained as part of the employee’s exit file. In the event of a dispute, the ability to evidence how the figure was calculated is often decisive.

3. How should employers communicate holiday entitlement on exit?

Communication is a critical risk control measure. Employers should not wait until the final payslip to explain holiday entitlement. Best practice is to:

• confirm the employee’s holiday balance early in the notice period
• explain how final entitlement will be calculated
• notify the employee if they are required to take holiday during notice
• give advance warning of any proposed deduction for overtaken leave

Clear, written communication reduces the likelihood of disputes driven by surprise or misunderstanding. It also demonstrates procedural fairness, which can be influential if a dispute progresses to tribunal.

4. What records should be retained?

Employers should retain records relating to final holiday entitlement calculations for a reasonable period, consistent with limitation periods for unlawful deduction claims. These records should include contracts, policies, calculation worksheets, payroll records, payslips and correspondence with the employee.

Poor record-keeping significantly weakens an employer’s ability to defend claims, even where the underlying calculation was correct.

Employer decision points and risk exposure

At a process level, employers must decide:

• whether contracts and policies adequately support the intended approach
• whether payroll systems can apply statutory rules correctly
• whether exit processes ensure early and transparent communication

Where employers fail to systemise holiday calculations, errors tend to repeat across multiple leavers. This increases exposure not only to individual claims but to patterns of non-compliance that are costly to correct.

Section G summary
Robust HR and payroll processes are essential to managing holiday entitlement when employees leave a job. Clear contractual drafting, accurate records, consistent calculation methods and early communication all reduce the risk of disputes. Employers who treat holiday entitlement as a controlled compliance process are far better placed to avoid claims and protect their reputation.

FAQs

This section addresses the most common questions employers and HR professionals ask when managing holiday entitlement for employees leaving a job. Each answer reflects statutory requirements and accepted best practice, with a focus on defensible employer decision-making.

Do employees accrue holiday during their notice period?

Yes. Employees continue to accrue statutory holiday throughout their notice period, regardless of whether they are working, on garden leave or absent due to sickness or maternity leave. Accrual stops on the termination date. If the employer pays in lieu of notice and has a contractual PILON clause, employment ends immediately and no further holiday accrues. Where there is no PILON clause and payment is made in lieu, holiday may continue to accrue during the notional notice period.

Can employers require employees to take holiday during notice?

Yes, provided the employer gives the correct notice. Under the Working Time Regulations, the employer must give notice that is at least twice the length of the holiday they require the employee to take. Employers must also comply with any contractual provisions governing holiday during notice and should communicate the requirement clearly in writing.

How is holiday entitlement calculated if the employee leaves mid-month?

Where employment ends mid-month, employers must ensure the calculation does not reduce the employee’s statutory minimum entitlement. If the contract permits rounding, it may be applied, but only where statutory entitlement is not undercut. In the absence of clear contractual authority, a calendar-day calculation is generally the safest and most defensible approach.

Are employees entitled to bank holidays that fall after their leaving date?

No. Employees are not entitled to bank holidays that fall after their employment has ended unless the contract provides a fixed entitlement regardless of leaving date. Holiday entitlement accrues only up to the termination date, and post-termination bank holidays do not generate additional entitlement.

Can employers deduct overtaken holiday from final pay?

Yes, but only where there is clear contractual authority or the employee has given prior written consent. Without such authority, any deduction will be an unlawful deduction of wages. Employers must also ensure that deductions do not cause pay to fall below National Minimum Wage levels, taking into account HMRC guidance.

How should holiday pay be calculated for employees with variable pay?

For employees with variable pay, statutory holiday pay must be calculated using the 52-week reference period based on paid weeks only. Employers may need to look back up to 104 weeks to identify 52 paid weeks. This averaging method applies equally to payments in lieu of holiday on termination.

What evidence should employers keep to defend holiday calculations?

Employers should retain records of the employee’s entitlement, accrual method, leave taken, pay calculations, contractual terms and all communications regarding final holiday entitlement. Clear documentation is often decisive in defending unlawful deduction claims.

Conclusion

Holiday entitlement when an employee leaves a job is a compliance issue with direct financial and legal consequences for employers. Errors in identifying entitlement, applying accrual methods or calculating holiday pay frequently result in unlawful deduction claims, payroll disputes and avoidable management time spent defending decisions that could have been prevented with clearer processes.

Employers must apply the Working Time Regulations 1998 accurately, distinguish statutory entitlement from contractual enhancements and ensure that any payment in lieu or deduction for overtaken leave has a clear legal basis. Particular care is required where employment ends mid-leave year, during notice, or following periods of sickness, maternity leave or irregular working patterns.

From a risk management perspective, final holiday entitlement should be treated as part of the wider termination and final pay framework, not as an isolated payroll calculation. HR and payroll teams should work together to apply consistent methods, retain clear records and communicate outcomes transparently to departing employees.

Where contracts are drafted carefully, policies are aligned with current law and calculations are applied consistently, holiday entitlement on exit becomes a predictable and defensible process rather than a source of dispute. This approach not only reduces legal exposure but also supports a professional and orderly offboarding experience.

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