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A recent Employment Appeal Tribunal decision (EAT) has confirmed that employees must receive at least their statutory minimum holiday entitlement up to the point they leave, or payment in lieu of that leave. 

Background 

In this case, the employee brought a successful claim for unlawful deduction from wages. The employee’s contract allowed the employer to calculate payment in lieu of holiday on termination at a lower rate than had they taken the holiday whilst they were working.

Despite this, the EAT said this practice was unlawful as it allowed the employer to pay less than the statutory minimum holiday (5.6 weeks per year) to which the employee was entitled.

Practical takeaway 

The Working Time Regulations allow a ‘relevant agreement’ between employee and employer (such as an employment contract) to set out how payment for any accrued untaken holiday will be calculated on termination. However, this case makes clear that any such contractual provision must ensure that the employee is entitled to at least statutory minimum holiday in the holiday year they depart (whether taken or paid in lieu).

The key takeaway from this case is to ensure that your employment contracts don’t go further than this. You’re entitled to say that employees don’t receive payment in lieu of any enhanced holiday on termination, but employees must still receive that all-important statutory minimum holiday.

What does this mean for your existing non-compete clauses and post-termination restrictions (PTRs)? Here’s what you need to know:

Only non-compete clauses – the proposals will not affect your ability to use other PTRs (such as non-solicitation or non-poaching clauses), garden leave periods, or confidentiality provisions. It’s only going to be non-competes that are time-limited to three months.

Existing clauses – we don’t know if the three-month limit will apply retrospectively to non-competes in existing contracts (effectively cutting short any longer clauses by default), or whether the limit will only apply to contracts entered into after the legislation comes into force.

Restrictions in other documents – the announcement only refers to non-competes in “employment contracts”. We’ll need to wait for further detail on the legislation to know whether you’ll be able to use longer non-competes in other documents such as shareholder or settlement agreements.

Test for enforceability – irrespective of the proposed time limit, non-competes will still only be enforceable if they go no further than necessary to protect your legitimate business interests. They’ll still need careful drafting!

Timescales – legislation will be introduced “when parliamentary time allows”. We’ll update you when we know more and when the legislation will be introduced.

Here are my top tips for creating contracts that are engaging, practical…and actually read:

Stop writing in the third person – swapping ‘the Company’ for ‘we/us’ immediately creates a connection with your audience and creates a more personal, interesting and engaging read.

Cut out the jargon – if your reader is having to wade through little understood terminology you’re losing their attention, fast! Employment contracts should be user-friendly and easy to understand throughout.

Intuitive layout – create a ‘start, middle and end’ that corresponds with the employment journey to make it easier to navigate and find relevant detail.

Keep it simple – don’t worry about catering for every eventuality. From a legal perspective that can be unhelpful and means the length of the document will in itself switch off the reader.

Here are my top three ‘quick wins’ to help save some cash within your contracts:

Holidays – departing employees often lose their ‘mojo’ during their notice period – it’s human nature. By requiring them to take accrued unused holiday during their notice period, you save on paying them a lump sum in lieu of untaken holiday when they leave.

PILON – payment in lieu of notice clauses are important, but costly. You’re paying a lump sum for someone to avoid working for you! How can you minimise the cost of PILONs? You can stagger payments and require departing employees to start their job search immediately, and then to tell you when they’ve found a new job. If you add in that they must start their new job as soon as an offer is received, you can potentially end notice pay at that point (provided you’ve paid at least the statutory minimum).

Probationary periods – save unnecessary admin and cost by commencing pension contributions once the employee has successfully completed the first three months of employment. You can also limit notice periods during probation – that way, if you feel that the individual doesn’t have the skills for the role, or simply just doesn’t ‘get it’, you can limit notice costs during this period.

There’s loads I could go into but my top tips would be:

Reflect reality – what’s important to your business will change over time. If you don’t think about updating your employment contracts as your business evolves, their value and effectiveness will dilute over time.

Protecting know-how – think about what makes your business unique. Your proposals, pitches, products, pricing…I could go on! They’re all capable of being protected, but you need to call them out in your contracts! Otherwise, they’re often fair game to departing employees.

Post-termination restrictions – “they’re not enforceable!”…if I had a pound for every time I’ve heard that! They’re definitely easy to get wrong, but are enforceable when drafted appropriately. Restrictions that aren’t specific or drafted tightly enough are highly unlikely to be upheld. You need to make sure the terms of the restrictions don’t go further than necessary to protect your legitimate business interests – stating an employee can’t ever work for a key competitor isn’t going to work unfortunately!