"We recently purchased a business via a share sale. The transaction was rushed and little due diligence was carried out before the sale took place. Now that I have reviewed personnel files, I have discovered that employees were being paid in lieu of their annual leave without the employees actually having taken that leave. I don’t think this is legal – how do I handle it?"

Entitlement

Firstly, you should remind yourself what period of annual leave an employee is normally entitled to. A regular five-day-per-week employee is entitled to a minimum of 28 days paid annual leave per year, and part time employees should receive a pro-rata amount based on that.

Of course, an employer can require its employees to take holiday during certain periods, such as over Christmas or during an annual shutdown. However, the Working Time Regulations (Northern Ireland) 2016 (“WTRNI”) specifically prevent an employee’s entitlement from being “replaced by a payment in lieu except where the worker’s employment is terminated”.

In this circumstance, there is no termination of employment. Therefore, your predecessor’s practice of paying its employees in lieu of holiday is not a lawful one.

Next steps

Your starting point should be a review of the contractual position. The company documents you have received will, hopefully, contain contracts of employment.

It may be that the contracts express the selling company’s illegal policy as a contractual term. If so, the term will be invalid and unenforceable and therefore will necessitate you to make a change to the terms and conditions of employment for each affected employee. As you will be aware, any such change may require a process of consultation. You should use this process to explain the reason for the change and what you intend to do going forwards. You may need to involve employee representatives as appropriate. You should take legal advice on the consultation process to follow and carry out a review of the contracts for any further unwelcome surprises.  

Alternatively, you may discover that there are no written contracts in existence, or that the contracts themselves are legally sound but that pay in lieu of holiday has been adopted in practice despite the wording of the contract.

You should take this opportunity to clearly outline your company’s departure from the unlawful practices of your predecessor, by consulting with employees and putting clear, professionally drafted policies and procedures in place.

Conclusion

Quite simply, your suspicions are correct. Payment in lieu of untaken holiday is unlawful except on termination. You should take steps to rectify such unlawful practice immediately, which may necessitate contractual change. It is important to consult employees throughout, as they will undoubtedly be unhappy to learn of the illegality of their past treatment.  You have an opportunity to build a positive relationship with your new employees by guaranteeing their statutory rights and may be able to harmonise holiday arrangements between new and existing employees.  

This scenario highlights the importance of legally sound and professionally drafted contracts and policies and procedures, in fostering a lawful and healthy working relationship, as well as the importance of a thorough and legally informed due diligence process when purchasing a business.