Employers may be able to pay in lieu of accrued but unused annual leave on termination only at the rate of pay applicable during the period the leave was accrued, rather than the rate applicable at the date of termination.  This could give rise to savings where employees have accrued the leave while on unpaid sabbatical or during a temporary period of reduced hours.

The ECJ has ruled that it was not contrary to the Working Time Directive for employees to receive no payment in lieu of untaken annual leave in respect of a period when they performed no work under a temporary zero-hours contract.

The Working Time Regulations specify that payment in lieu on termination is to be calculated at the rate of pay applicable at termination, unless the employee’s employment contract (or other “relevant agreement”) specifies the sum due.  Employers could therefore stipulate in the employment contract that any sum in lieu of untaken leave on termination will be calculated according to the pay rate when accrued (save in respect of leave accrued during sickness and family-related leave, where the legal position is different). (Heimann v Kaiser, ECJ)