Annual leave entitlement. A troublesome subject and one which causes many employers to scratch their heads when it comes to the maths.

You may not realise it, but many businesses undercalculate annual leave entitlement for their starters and leavers. Not by much, but in the event that an employee with more than two years’ service leaves and raises a claim with a Tribunal for unfair dismissal or discrimination, they could add an additional claim onto the main head of claim for Unlawful Deduction of Wages in the event that they believe they have been underpaid for annual leave accrued in their final year of employment.

How so, you ask?

Many employment contracts state something along the lines of “Employees starting or leaving employment during the Annual Leave year are entitled to leave proportionate to the completed calendar months’ service during the leave year.” Or words to that effect. The section in bold is the key part of this sentence.

So, where an employee has this in their contract and leaves during, say, the third week of the month, because it is an incomplete month they would not be entitled to accrue annual leave for those last three weeks of work. This could be the equivalent of 1.5 days of annual leave, or more if you offer enhanced annual leave.

By contrast, the Working Time Regulations 1998, which govern the provision of annual leave, do not specify whether leave can or should be accrued in ‘complete months’, only that the leave accrued should be proportionate to the part-year worked.

The Government annual leave calculator will calculate annual leave right up to and including the last day of employment (or indeed, from the first day of employment for new starters). Best practice would be to calculate and pay out every hour of annual leave accrued. Common practice is to round up to the nearest hour or half day if paying for outstanding accrued annual leave, and to round down if the Employee has taken more annual leave than they are entitled to and therefore owes the business. However, legislation dictates that all part-days must be treated as whole days so do something different with caution.

The difference in approach between the legislation, and the contractual norm isn’t much, but is it worth the risk of short-changing your employee on exit? In the event of this being an add-on to another Employment Tribunal claim, no, it’s not worth it. In reality the worst that is likely to happen as a result of a successful unlawful deductions claim is that you would be required to redress the shortfall in annual leave pay. But employers beware! Tribunals will pick up on little niggles like this. They can be a red flag to the judge, implying that you routinely cut corners, and thus adding weight to an employee’s claim.

In all, it’s probably not worth the risk, and, as a result, you get happy and engaged employees, and satisfied leavers who aren’t grumbling about how your company didn’t pay all the annual leave pay they were owed. Win-win!