Annual Leave Policy: What to Include

An annual leave policy is a critical aspect of supporting consistent and compliant management of workplace holiday entitlements. This helps to avoid grumbles or disagreements within teams and ensures workers are receiving their full entitlement to paid time off work.

Without any annual leave guidelines or policy, managers and staff are likely to be unclear about how and when leave entitlement can be used and how requests for time off work should be dealt with.

 

What should an annual leave policy include?

 

While the policy should be drafted to suit your specific organisation’s needs, the following are standard areas to cover in an annual leave policy:

 

• State when your company holiday year begins and ends. Some organisations set their holiday year based on a calendar year, while others may follow their financial year. However you operate, make this clear in the policy.
• Be clear about the process to request, approve or deny annual leave.
• State if there is a limit on the amount of leave that can be taken at one time, and if there is any process and criteria for discretionary requests that exceed this limit.
• Are there any requirements your organisation has for dictating when holiday should or should not be taken, such as a ban on annual leave during known busy periods?
• State whether the annual holiday entitlement is inclusive or exclusive of bank holidays. Also state how additional bank holidays will be treated.
• If you have workers on irregular hours, or part time employees, or other less traditional type of contract, explain how their annual leave entitlement is calculated.
• Explain how any contractual leave in excess of the statutory minimum accrues both during the holiday year and during any periods of sick leave and whether any holiday entitlement in excess of the statutory entitlement can be carried forward to subsequent years.
• State the formula for calculating payment in lieu of any accrued holiday upon the termination of employment.
• State whether your organisation requires any accrued leave to be taken during notice periods to avoid having to make a payment in lieu on termination.
• State the right to deduct any overpayment of holiday pay where the employee has taken more leave than has accrued as at the termination of employment.
• If your organisation allows rolled up holiday, you should explain the rules here.

 

Employers should review their annual leave policy on a regular basis to ensure continued legal compliance and workforce management best practice.

 

Employer legal obligations relating to annual leave

 

An employer’s legal obligations towards its employees are governed by the Working Time Regulations 1998 (as amended) (“WTR”).

A summary of the basic legal obligations relating to annual leave under the WTR are as follows:

 

• All workers are entitled to a minimum of 5.6 weeks’ paid leave in each leave year, capped at 28 days for an employee working 5 days a week or more (pro-rata for part-time employees). Bank and public holidays can count towards this entitlement.
• The employer can determine the date that its holiday year commences provided that this is set out in writing (usually in the contract of employment).
• Save in certain circumstances, the statutory minimum paid leave cannot be carried forward to a following holiday year, and it cannot be substituted by a payment in lieu except upon the termination of employment.
• There is no minimum period of continuous service required to qualify for statutory annual leave.

 

A worker whose employment begins part way through a holiday year is entitled to paid annual leave for that year, pro-rated according to the portion of the holiday year worked.

Both the amount of paid holiday and the way in which it accrues can be changed by the employer, provided that its terms are more generous than the statutory minimum position required by the WTR.

In terms of taking leave, the WTR sets out minimum periods of notice that the employee must give to the employer when requesting leave, and that the employer must give to the employee if the dates requested are declined.

An employer can also give notice requiring the worker to take statutory holiday on certain specified dates.

The notice requirements in relation to the taking of leave may be varied by way of certain forms of written agreement with the worker (including the provisions set out in the contract of employment).

 

Common areas of risk for employers

 

Procedure to request leave

Use the annual leave policy be clear on how and when employees should request time off. How much notice do they need to give? Who do they make that request to? Is there a system you would like them to use to make that request concrete?

Also explain how requests will be decided. If you take requests on a first-come-first-serve basis, make it clear. Likewise, describe what actions an employee should take if they wish to dispute a refusal for any leave request.

You can also use this opportunity to outline consequences for a staff member taking leave without approval.

 

Rolled-up holiday rules

Employers sometimes specify that part of the hourly or daily rate of pay given to casual workers or those working irregular hours constitutes holiday pay. This practice became known as ‘rolling-up’ holiday pay into the rate of basic pay. It was (and sometimes still is) used to overcome the difficulty and administrative burden of having to calculate the amount of holiday due when it is not known in advance how many hours will be worked, and therefore how much holiday will accrue.

The European Court of Justice has made it clear that rolled-up holiday is unlawful, but also said that any such payments that had been made by employers could be set-off against any claims against them for unpaid holiday pay, provided that certain conditions were met relating to the transparency of the holiday pay element. This has led to confusion as to whether although technically unlawful, employers could, in practice, continue to get away with carrying on rolling-up holiday pay with the basic rate of pay on the basis that it would be set off against any claims against them.

The WTR does not specifically deal with the issue. However, the current government guidance states that holiday pay should be paid at the time that holiday is actually taken and that an employer cannot include an amount of holiday pay in a worker’s hourly rate (i.e. rolled-up holiday pay is not permitted).

As the risk in the event of a claim against an employer for unpaid holiday pay is that it might find itself liable for this on top of the rolled-up holiday pay it has already paid, any ongoing practices of paying rolled-up holiday pay should cease.

 

Bank holidays rules

The first thing to make clear is that there is no statutory right for any worker to take time off on a bank holiday. The ability to take bank holidays off work, whether as paid or unpaid leave, will depend upon the provisions of the contract of employment (whether set out expressly in writing, agreed verbally, or implied by custom and practice). However, where bank holidays are given as paid time off, these can count towards discharging the statutory minimum entitlement to paid leave.

The entitlement of part-time workers’ to bank holidays has always been problematic, particularly where employers provide that workers are entitled to a specified number of days’ holiday in addition to bank holidays that fall on their normal working days. This often results in unfairness to part-time employees, particularly those who do not work on a Monday, when the majority of bank holidays fall. Therefore on the basis that part-time workers should not be treated less favourably than their full-time counterparts under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, they should receive a pro-rated entitlement to all the bank holidays according to the number of hours they work, even if they do not normally work on the day on which the bank holiday falls.

In terms of additional bank holidays, how these are handled will depend on the employee’s entitlement under the contract of employment. For example, contracts that state something to the effect that ‘employees are entitled to paid leave of x days in addition to all bank and public holidays’, will result in employees automatically being entitled to the extra bank holiday as paid leave.

The practical solution in order to avoid both (a) the need to pro-rata bank holidays in addition to other leave for part-time employees; and (b) to automatically having to permit employees to take an extra day’s paid leave for any additional bank holidays, is to simply specify an overall number of days paid leave entitlement for full-time employees, which includes all bank holidays falling on their normal working days, and give part-timers a pro rata entitlement to that overall entitlement.

 

Holiday entitlement when an employee resigns

Employees are permitted to take what remains of their statutory annual leave during their resignation notice period. As an organisation, you might want to offer payment in lieu of that holiday time.

It’s the law that employers have to pay for untaken statutory leave, regardless of under what terms an employee leaves. If your company offers more than the statutory minimum, you can dictate your own arrangements for how to distribute the additional leave.

If an employee has taken more than what they’ve accrued, the law dictates that you can’t take that amount from their salary. Unless, of course, it’s written in an employment contract.

That is why it is crucial to keep track of time off records.

 

Holiday entitlement for an employee who is off work on sick leave

A worker on sick leave continues to accrue the statutory minimum holiday entitlement, even if their absence spans a complete holiday year. Employers who give significantly more generous holiday entitlement than the statutory minimum can restrict the accrual of the excess contractual holiday entitlement during sick leave provided this is clearly set out in the contract of employment.

A worker on long term sick leave can take their statutory minimum holiday entitlement during periods of sick leave (this is likely to be requested when a worker’s sick pay has expired).

Certainly in terms of public sector workers (and possibly private sector workers too), a worker who is on sick leave over a period of pre-booked annual leave must be permitted to take the holiday at another time, even if that means taking it in another leave year.

 

Can an employer require a worker to take any accrued but untaken leave during their notice period?

Under the WTR, the employer has the power to require a worker to take leave at specified times, provided that the employer gives the worker notice of at least twice the length of the holiday to be taken. However, this is sometimes of little use to an employer where there is insufficient time to give the employee requisite notice in time for the leave to be taken during the notice period.

As such, notice periods can be varied by certain forms of written agreement, including a contract of employment, this issue can be dealt with by the contract containing a notice that any unused holiday will be required to be taken during the notice period, thereby removing the need for the employer to give any further notice of this requirement when an employee resigns or is dismissed.

 

Need Assistance?

 

For expert advice, contact our HR & employment law specialists.

 

Annual Leave Policy FAQs

 

What is the minimum annual leave entitlement in the UK?

In the UK, full-time employees are legally entitled to a minimum of 28 days of paid annual leave per year, which includes public holidays. This entitlement is pro-rated for part-time employees based on their hours of work.

 

Can employees carry over unused annual leave?

Employees are generally expected to take their full annual leave entitlement within the leave year. However, under certain circumstances, such as sickness or agreed arrangements, some of the unused leave can be carried over to the next leave year.

 

How should holiday pay be calculated?

Holiday pay should reflect the employee’s normal earnings, including any regular overtime, commission, or bonuses. Employers must calculate holiday pay based on the average earnings over the previous 52 weeks in which the employee worked.

 

Do bank holidays count towards annual leave?

In the UK, bank holidays can count towards the statutory annual leave entitlement of 28 days. However, employers can choose to offer additional leave on top of this or require employees to work on bank holidays with compensatory leave provided.

 

Can an employer refuse an annual leave request?

Employers have the right to refuse an annual leave request if it does not suit the business needs, such as during peak times or when multiple employees request leave at the same time. However, any refusal should be communicated promptly, and employers should ensure fairness and consistency in their decisions.

 

What happens to annual leave during maternity leave?

Employees continue to accrue annual leave while on maternity leave. This leave can be taken before or after the maternity leave period, and employers should ensure that the employee has the opportunity to use their accrued leave.

 

Is annual leave affected by probationary periods?

Employees accrue annual leave from their first day of employment, even during a probationary period. However, some employers may have specific rules about when leave can be taken during probation, such as limiting the amount of leave or requiring management approval.

 

How should employers handle leave requests during busy periods?

Employers should have a clear policy in place that outlines how leave requests will be managed during busy periods. This might include encouraging employees to book leave well in advance or implementing a first-come, first-served system to ensure fairness.

 

Can an employee take unpaid leave instead of annual leave?

Unpaid leave is typically granted at the discretion of the employer and is not a statutory right. If an employee has used all their annual leave entitlement, they may request unpaid leave, but the employer is not obliged to grant it.

 

What should be done if an employee doesn’t take their full leave entitlement?

Employers should encourage employees to take their full leave entitlement within the leave year to avoid burnout and ensure compliance with working time regulations. If an employee fails to take their leave, and there are no special circumstances, they may lose their entitlement, depending on the company’s policy.

 

Glossary

 

 

Term	Definition
Annual Leave	Paid time off work that employees are entitled to take each year, typically used for holidays or rest.
Accrual	The process by which employees accumulate their annual leave entitlement over time, often monthly or quarterly.
Bank Holidays	Public holidays in the UK that can be included as part of the statutory annual leave entitlement.
Carryover	The process of transferring unused annual leave from one leave year to the next, under certain conditions.
Holiday Pay	The amount of pay an employee receives during their annual leave, which should reflect their normal earnings.
Maternity Leave	A statutory period of leave that a woman is entitled to take before and after giving birth, during which annual leave continues to accrue.
Notice Period	The amount of notice an employee must give to request annual leave, as stipulated in the employer’s leave policy.
Pro-Rata	The proportionate amount of annual leave that part-time employees are entitled to, based on their hours of work compared to full-time employees.
Statutory Entitlement	The minimum amount of annual leave that employees are legally entitled to under UK law, currently 28 days for full-time workers.
Working Time Regulations 1998	UK legislation that governs working hours, rest breaks, and annual leave entitlements, ensuring fair treatment of employees.