Pay in lieu of untaken leave

What it means

Payment in lieu of untaken leave is the cash compensation an employer pays for days of annual leave an employee did not manage to take before the employment ended. While employment lasts, leave cannot be replaced by money; it must be taken as time off.

The amount is the employee’s average earnings for each untaken working day. It makes no difference whether employment ended by notice, by agreement or on expiry of a fixed term; compensation is always due if leave remains untaken.

The payment is part of employment income, so contributions and tax are paid on it just as on wages. It is paid with the final pay, on the next payday after employment ends.

How it works in practice

When employment ends we first reconcile the leave records: the entitlement for the part of the year worked, leave carried over from last year and what the employee has already taken. The entitlement is reduced pro rata by whole months worked, so we calculate carefully for anyone joining or leaving mid-year.

If the employee has a long notice period, we agree with the employer whether the leave will be taken during it. That is often cheaper and more practical, as the cost is spread and the employer does not have to pay a larger sum all at once in the final pay.

We show the payment on a separate line of the payslip and in the payroll record, and carry it into the employment certificate and the reports for the insurers. In a collective redundancy we prepare an overview of the payments for all departing employees at once.

What to watch out for

Paying money instead of leave during employment breaches the Labour Code, and a labour inspectorate check can end in a fine. The employer must schedule leave so that the employee takes it, as a rule, by the end of the following year.

An error in average earnings, for example with irregular bonuses or a change in working hours, flows straight into the payment. A former employee can claim the shortfall with late-payment interest, so we always check the calculation twice when someone leaves.