Employee Termination: Scope of Payments in Lieu of Holiday

The recent Employment Tribunal case of Podlasiak v Edinburgh Woollen Mill Ltd has confirmed that a token payment in lieu of holiday upon termination is not acceptable.

The case confirmed that such payments must reflect normal pay, underlining the importance for both employers and employees to have due regard to compensation mechanisms following termination.

Background to Podlasiak v Edinburgh Woollen Mill Ltd

In this case the claimant worked for a company under ‘a zero hours’ contract, meaning that there was no obligation on the part of the employer to provide the employee with work and the employee effectively consented to work as and when required.

Upon termination, the claimant had some time (3 days) left as part of her yearly holiday plan. If she would have taken this holiday the employer would have had to pay her a sum of £176. Relying on a term of her employment contract, her employer argued that she was in fact entitled only to £1, effectively a token amount of compensation.

Employment Tribunal Rejects Token Compensation

The Employment Tribunal stated that the claimant must succeed in this case, and that token payments are not acceptable. This meant that Edinburgh Woollen Mill had to pay the claimant £176 in lieu of untaken holiday.

The Employment Tribunal noted that the Regulation 14 (3) of the Working Time Regulation 1998 indeed allows employers to set their own payment amounts in agreements. However, that regulation must be read in conjunction with the EC Working Time Directive and, where possible, that Directive must be given effect.

In making its decision the Tribunal relied on a previous decision of the European Court of Justice (Stringer/Schultz-Hoff), where it was decided that pay in lieu of untaken holiday must be calculated to reflect ordinary pay which the employee would have received had they taken the holiday.

Implications of Podlasiak v Edinburgh Woollen Mill Ltd for Employment Contracts

The sheer number of employment agreements made where a token payment clause is inserted means that the implications of the Podlasiak v Edinburgh Woollen Mill Ltd decision are far-reaching. The primary consequence of this case’s outcome are that from now on any token payment in lieu of holiday is likely to be disregarded and will not affect future claims by the employee.

However, it must also be taken into account that the Podlasiak v Edinburgh Woollen Mill Ltd decision is only the first decision on this point of law, and, therefore, it is not impossible (although unlikely) that other tribunals may made different decisions in similar circumstances.

Comment

‘Token payment’ clauses may still be included in contracts of employment because if there is dismissal of an employee for gross misconduct a tribunal may still make a distinction between Podlasiak v Edinburgh Woollen Mill Ltd and the case in question.

Nevertheless, until that happens the decision of Podlasiak v Edinburgh Woollen Mill, although not binding on other courts, must be respected and generally employers must continue paying their employees the normal rate for untaken holidays on termination of their employment contracts.

If you would like more information regarding termination clauses in employment contracts please contact Aneil Balgobin via e-mail ABalgobin@rollingsons.co.uk or by telephone on 0207 611 4848.