Long-Term Sick & Final Holiday Pay: How to Calculate for Leavers

Managing an employee's departure involves numerous administrative tasks, and calculating their final pay is one of the most critical. This process can become particularly complex when the departing employee has been on long-term sick leave. For small and medium businesses, understanding the rules around holiday accrual during sickness is essential for ensuring compliance and fairness.

This guide will walk you through the key principles and steps for accurately calculating final holiday pay for employees leaving your company after a period of long-term absence.

Understanding the Basics: Holiday Accrual on Sick Leave

Under UK employment law, a foundational principle is that employees continue to accrue their statutory holiday entitlement while on sick leave. This applies regardless of how long the employee is off work.

• Statutory Entitlement: All workers are entitled to 5.6 weeks of paid holiday per year.
• Continuous Accrual: This entitlement continues to build up month by month, even when an employee is receiving Statutory Sick Pay (SSP) or is on unpaid sick leave.

Failing to account for this accrued holiday in a leaver's final pay can lead to legal disputes and financial penalties.

The Impact of Carried-Over Holiday

When an employee is on long-term sick leave, they are often unable to take their annual leave during that holiday year. In this situation, the law allows them to carry over the unused portion of their statutory leave.

• Carry-Over Rules: An employee can carry over up to 4 weeks of their 5.6-week statutory entitlement if they were unable to take it due to sickness.
• Time Limit: This carried-over leave must typically be used within 18 months from the end of the holiday year in which it was accrued.

When an employee leaves the company, any of this untaken, carried-over holiday must be included in their final pay calculation. Manually tracking these variables can be a significant administrative burden, which is why a robust payroll platform is invaluable for ensuring accuracy.

How to Calculate Final Holiday Pay: A Step-by-Step Guide

To calculate the correct payment in lieu of holiday for a leaver who was on long-term sick leave, follow these steps.

Step 1: Calculate Total Accrued Holiday for the Current Year

First, determine how much holiday the employee has accrued in the current leave year up to their termination date.

• Formula: (Total annual entitlement / 12) x Number of completed months of service in the leave year.

Step 2: Add Any Carried-Over Holiday

Review your records to identify any untaken statutory holiday that was carried over from previous leave years due to sickness. Add this to the figure from Step 1.

Step 3: Subtract Holiday Already Taken

Deduct any days of annual leave the employee took during the current leave year before their employment ended.

Step 4: Calculate the Payment in Lieu

The remaining number of holiday days must be paid out. The rate of pay for this depends on the employee's pay structure.

• For Salaried Employees: The calculation is usually straightforward, based on their standard daily or hourly rate.
• For Employees with Variable Hours/Pay: You must calculate their average weekly pay over a 52-week reference period, excluding any weeks where they did not receive pay.

This final step can be particularly challenging. Using comprehensive payroll software can automate these complex calculations, ensuring you use the correct reference period and pay rate, thereby maintaining compliance with UK regulations.

A Practical Example

Let's imagine an employee, Alex, who works Monday to Friday.

• Annual Holiday Entitlement: 28 days (including bank holidays).
• Leave Year: 1st January – 31st December.
• Long-Term Sick Leave: Started on 1st March.
• Termination Date: 30th June.
• Carried-Over Leave: Alex has 5 days of untaken holiday carried over from the previous year due to sickness.
• Leave Taken This Year: Alex took 3 days of holiday in February before going on sick leave.

Calculation:

1. Accrued Holiday this Year: Alex worked for 6 months (Jan-June). (28 days / 12 months) x 6 months = 14 days.
2. Add Carried-Over Leave: 14 days + 5 days = 19 days.
3. Subtract Leave Taken: 19 days - 3 days = 16 days.
4. Final Payment: Alex is owed payment for 16 days of holiday in their final pay.

Conclusion

Calculating final pay for leavers on long-term sick leave requires careful attention to detail regarding holiday accrual and carry-over rules. By following a structured process and keeping meticulous records, you can ensure your calculations are accurate and compliant.

For businesses aiming to streamline workforce management, leveraging an integrated HR and payroll system can remove the guesswork, automate complex calculations, and provide peace of mind that your processes are both fair and legally sound.

---