Payments in lieu of untaken holiday - contract versus regulation

01/03/2010

By Nick Hobden, Partner and Head of Employment.

The cases of Stringer v HMRC and Pereda v Madrid Movilidad, confirmed that employees continue to accrue holiday whilst on sick leave.

The case law also seems to indicate that employees can choose to take holiday whilst off sick, but an employer cannot compel them to do so. The next twist in the tale was that the European Court of Justice decided that if an employee did not manage to take all their holiday entitlement due to being on sick leave, then that holiday would roll over into the next holiday year.

With so much of the law in this area being prescribed by legislation and case law, one might begin to wonder whether there is any role for the contract of employment in setting the parameters of employees' rights. Well the recent case of Beijing Ton Ren Tang (UK) Ltd v Wang underlines the continuing importance of well-drafted terms and conditions.

Mrs Wang, a professor of Chinese medicine, started working for Beijing Ton Ren Tang ("BTRT") in 2001 at their herb and health shop in London. She was told that she was entitled to 30 days' holiday and would be paid in lieu of any untaken holiday at the end of her employment. Apart from one 28-day trip to China, Mrs Wang only took four days' holiday per year. This meant that when her employment terminated in 2008, she had accrued 131.5 days of untaken leave.

BTRT argued that under the Working Time Regulations 1998 ("WTR"), only the untaken holiday from Mrs Wang's last year of employment was due to be paid in lieu. However the EAT found that an oral contract had been made which entitled Mrs Wang to payment in lieu of all untaken holiday throughout her employment. The EAT decided that where a contractual benefit is more favourable than the rights imposed by the WTR, the employee is entitled to take advantage of their greater contractual rights.

There are clearly lessons to be learnt from this case. Employers need to consider the terms of their employment contracts. It seems possible that a contract which simply provides the right to a payment in lieu of untaken holiday upon termination could be construed to mean all untaken holiday from the very beginning of the employment relationship. Holiday provisions may therefore need to be reviewed with this risk in mind and changes made where appropriate.