Calculating annual leave entitlements and ensuring workers receive the correct holiday pay can be a real challenge for employers. In this guide we will provide an overview of annual leave, as well as practical tips on how to manage leave effectively.
Detailed information is available on the gov.uk website: Holiday Entitlement Rights
The purpose of annual leave
Annual leave enables workers to take paid time off work, to rest and re-energise. ACAS states that taking time off enables workers to be well-rested and to maintain their physical and mental health. Research has also shown that taking regular annual leave has a positive impact on work productivity and performance, and reduces the risk of workplace accidents and stress. So, it really is in the best interest of both your employees and your business to ensure your workers take their annual leave entitlement.
Statutory entitlement to annual leave
The Working Time Regulations provides all workers with the right to 5.6 weeks’ statutory annual leave each year, irrespective of the hours they work. This equates to 28 days annual leave per year for someone working 5 days per week. The statutory entitlement is capped at 28 days per year, so individuals working 6 or 7 days per week will not be entitled to more leave.
Almost all workers, except those that are genuinely self employed, are entitled to statutory annual leave. This includes: employees; workers; part timers; agency workers; workers on zero hours contracts; casual staff; and workers with irregular hours.
Leave entitlements for part time workers are calculated on a pro rata basis, according to the number of days worked. For example, a part time worker on 3 days per week will be entitled to 16.8 days’ holiday (3 x 5.6) a year.
There is a useful annual leave calculator on the gov.uk website: Gov.uk Calculate your holiday entitlement
You can choose to offer above the statutory minimum entitlement. For example, many employers offer an extra day of leave for every year of service, up to a specific limit.
Public Holidays
There is no statutory entitlement to paid time off on public holidays. Instead, there is a legal right to a minimum of 5.6 weeks annual leave per year. Most employers choose to include public holidays within this 5.6 weeks’ entitlement, although there is no legal requirement to do so.
The employment agreement should state the workers’ entitlement to leave and whether this includes public holidays. For example, the annual leave clause may state:
- ‘28 days annual leave which includes public holidays’; or
- ’20 days annual leave plus 8 public holidays’
Depending on the nature of the business, an employer may require the worker to work on public holidays that fall on their normal day of work. This should be specified in the employment agreement, as well as any enhanced payment terms (if applicable).
Calculating Holiday Pay
The basic principle when considering how to calculate holiday pay is that workers should receive the same pay during annual leave that they would have received had they been at work.
This includes: base pay, overtime payments, allowances, bonus and commission.
This sounds simple, but can become a complex calculation for workers with irregular hours of work and pay. In these circumstances, you should look back at a worker’s previous 52 weeks of pay (the ‘reference period’) to determine the worker’s average earnings. The reference period should exclude any weeks that the worker didn’t work.
Further information on calculating holiday pay is contained within our guide How to calculate holiday pay: a complete guide for employers.
Accrual of annual leave
Workers start accruing annual leave from their first day of employment, including during their probationary period. For each month of employment, the worker will accrue 1/12 of their annual entitlement. A full time worker entitled to 28 days per year will accrue 2.3 days leave per month.
Workers will continue to accrue annual leave during most periods of absence including: sick leave; maternity leave; paternity leave; adoption leave; shared parental leave; and furlough leave.
Employers should decide on a ‘leave year’, ie the time period within which workers are expected to use their annual leave entitlement. It is up to you to determine the dates of the leave year, and to communicate the dates to your workers. For example, many employers use 1 April to 31 March as the relevant time period.
Annual leave on termination of employment
On the termination of employment (including dismissals), workers will receive payment in lieu of holiday for any unused accrued leave. If a worker has taken more annual leave than they have accrued, employers can make a deduction from their final pay only if there is a relevant clause in the employment agreement or if the worker gives their written consent in advance.
Can workers carry over annual leave?
In most circumstances, workers are required to take at least four weeks leave during the leave year.
It is at the employers’ discretion to decide whether to allow workers to carry over any remaining leave entitlement (over and above the four weeks) to the following leave year. Some employers choose to adopt a ‘use it or lose it’ approach to encourage workers to take their leave.
However, there are a few exceptions to the rule that most annual leave cannot carry over. If a worker has been unable to take their annual leave as they have been on some other form of leave, they can carry over some or all of their untaken leave to the following year. This applies where a worker has been on long term sick leave, maternity leave, paternity leave, shared parental leave or adoption leave.
In NHS Leeds v Larner, the Court of Appeal held that the employee who had been unable to use their annual leave as they had been on long term sick leave, should be able to carry over four weeks’ entitlement (ie 20 days for a full time worker). In Plumb v Duncan Print Group, the Employment Appeal Tribunal held that where leave is carried over in such circumstances, the leave must be taken within 18 months.
Similarly, workers who have been unable to take all their leave due to the COVID-19 pandemic, are permitted to carry over their leave for a maximum of two years.
Can workers cash up annual leave?
Untaken statutory leave cannot be replaced by a payment in lieu, except on termination of employment.
However, employers may offer workers the option of cashing up contractual annual leave (ie leave over and above 28 days per year).
Can an employer specify when annual leave will be taken?
Employers may specify when annual leave will be taken. For example, many employers close down over Christmas and New Year, and on bank holidays. This needs to be clearly communicated to workers, for example in the employment agreement, annual leave policy or in a written communication to relevant workers.
You will ideally provide as much notice as possible to enable workers to make arrangements. As a minimum, the notice period should be at least twice as long as the leave the worker is required to take (unless otherwise specified in the employment agreement). For example, if workers are required to take one weeks leave over Christmas, you must provide at least a fortnight’s notice.
You may also restrict when leave can be taken, for example during busy periods. Employers may specify that no leave at all will be approved, or may limit the number of workers that can be on leave. However, exceptional circumstances should always be taken into consideration.
Can an employer decline a leave request or cancel leave?
Employers may decline an annual leave request or cancel approved leave, if there are genuine business reasons to do so. Reasonable notice must be provided. As an absolute minimum you must give as much notice as the amount of leave requested, plus one day. For example, you should give 6 days’ notice if the worker has requested 5 days’ leave.
You should explain the reasons why it is not possible for leave to be taken (ie it would leave the business short staffed), and alternative dates should be discussed with the worker.
Cancelling a worker’s leave should only be considered where absolutely necessary, given the impact it is likely to have on the worker. Alternative options should first be explored.
What happens if a worker is sick while on annual leave?
A worker who is sick whilst on annual leave is entitled to transfer the holiday days when they were ill to a new holiday period when they return to work. Their absence should be treated as sick leave, with their usual entitlement to company sick pay or statutory sick pay. Workers must still follow any requirements of the company absence procedure, such as notification and providing a fit for work note (if applicable).
How to effectively manage annual leave
Managing annual leave appropriately can be a real challenge for employers. In 2017, Ryanair was forced to cancel hundreds of flights after ‘messing up’ holiday planning for pilots.
Despite the clear benefits of taking leave, a recent Glassdoor survey found that the average employee takes just 62% of their annual leave entitlement each year.
Not only is this detrimental for the health and well-being of workers (which could impact on performance at work), it can also place additional pressure on employers. As workers are unable to carry over the majority of their leave, excess leave balances can result in many workers wanting to take leave at the same time to avoid losing their leave entitlement. This can result in the business becoming short staffed and/or unable to meet KPIs, or low morale if leave requests are declined.
Here are some useful tips on managing annual leave effectively:
Annual leave planning
Careful planning is needed to ensure there aren’t too many people off at the same time, causing the business to be short staffed. Line managers should be aware of the work priorities for the year, and the likely peaks and troughs in workload. Limits should be placed on the number of people on leave during peak periods.
Line managers should regularly check the leave entitlements of their team. Where workers have excess leave, the line manager should discuss this with the individual concerned and ask them to plan when their leave will be taken that year. Ideally this will be resolved by reaching an agreement. However, if needed, the employer can require the worker to take leave on specific dates, provided reasonable notice is provided.
Have a clear and transparent process for approving leave
To avoid perceptions of unfairness, it is important to have a clear and transparent process for approving leave requests. For example, some employers approve leave on a ‘first come, first served’ basis, while others use a ballot system for popular times of the year such as school holidays and public holidays.
If there are times of the year when workers can’t take leave (for example, busy trading periods) or if there are restrictions on the number of workers that can be on leave at the same time, this should be clearly communicated in writing.
Introduce an Annual Leave Policy
All employers should have an annual leave policy to ensure that workers are aware of their rights and obligations. The policy should include:
- Entitlement to annual leave and public holidays;
- Dates of the leave year;
- Any dates that are required to be taken as annual leave, such as Christmas shut downs or public holidays;
- Any dates when annual leave is not permitted;
- Whether leave can be carried over, and any restrictions that may apply;
- Any restrictions on the amount of leave that can be taken (for example, no more than two weeks’ leave), or on the number of staff that can be off at any one time;
- How to apply for leave and required notice;
- The process for approving leave – such as first come, first served; and
- Whether the worker will be required to work on public holidays and how they will be paid.
Place restrictions on the carry over of annual leave
Employers may choose to allow workers to carry over some of their annual leave entitlement (leave in excess of 4 weeks) to the following leave year. Many employers adopt a ‘use it or lose it’ approach to avoid a build up of excess leave. Where an employer does allow carry over of leave, it is advisable to restrict the amount of leave that can be carried over or include a requirement that the leave should be taken within a specific period of time. In Marriott v Nottingham Mencap a relaxed approach to the carry over of leave resulted in a £4.2k holiday pay award after the employee was made redundant. The arrangements for carrying over leave should be specified in the employment agreement or employee handbook.
Avoid discrimination
Annual leave can be a contentious issue in any business, and employers should be aware of the risk of a discrimination claim. It is important to ensure that workers are not directly or indirectly discriminated against on the basis of a protected characteristic, such as age, gender reassignment, being married or in a civil partnership, being pregnant or on maternity leave, disability, race, religion or belief, sex or sexual orientation. For example, think carefully before declining a request for annual leave for a worker who wishes to observe a religious holiday.
What can we do to help?
If you would like advice on annual leave, please contact our team on 0330 223 5253 or office@fitzgeraldhr.co.uk. We would be delighted to help you.
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