Use It or Lose It Holiday Policy UK: Key Rules

It’s best practice for employers to be clear on how they deal with circumstances where workers have not used all of their annual leave. One possible approach is to adopt a ‘use it or lose it’ holiday policy, but this brings wider considerations, both to avoid damaging employee relations and to ensure workers receive their full entitlement to time off work.

A “use it or lose it” holiday policy requires employees to take their annual leave within a specific timeframe, such as the holiday year, or risk forfeiting any untaken days. These policies are common in the UK, where employers aim to manage workloads and ensure staff take necessary rest. However, there are legal and practical considerations for employers.

Under UK law, employees are entitled to a minimum of 5.6 weeks of statutory paid leave per year, including bank holidays. Employers cannot deny statutory leave, and if employees fail to take it, employers must show they encouraged staff to take their holidays. If they cannot, forfeiture of leave may be deemed unfair or unlawful. Employers must ensure they communicate holiday entitlements, deadlines and any rules around carryover clearly and well in advance.

Risks for employers include breaching the Working Time Regulations 1998, particularly if employees can demonstrate they were unable to take their leave due to workload, illness, or a lack of encouragement. Forcing forfeiture without proper procedure can lead to claims for unpaid leave or disputes.

To mitigate risks, employers should implement clear holiday policies, encourage staff to take leave regularly and address any barriers preventing employees from using their entitlements.

In this guide for employers, we explain the rules on statutory holiday entitlement. We also look at the benefits and potential drawbacks of adopting a ‘use it or lose it’ policy in the workplace, as well as alternative options for employers when dealing with unused holidays, from carrying days over into the following leave year to payment in lieu.

 

How much paid holiday are UK workers entitled to?

 

Most workers in the UK are legally entitled to 5.6 weeks paid holiday a year. This means that those who work a 5-day week must receive at least 28 days paid annual leave. This comprises 4 weeks (20 days) derived from EU law and 1.6 weeks (8 days) from UK law, although an employer is allowed to include bank holidays and other public holidays in this.

A part-time worker is also entitled to at least 5.6 weeks paid holiday, but this will amount to fewer than 28 days, once this has been calculated on a pro rata basis. For example, if they work 3.5 days a week, they must get at least 19.6 days leave a year (3.5 × 5.6).

The employer can choose to round up an individual’s holiday entitlement, but they cannot round it down. Employers must also provide workers with the statutory minimum, although they can agree to give more by way of contract. In many cases, a worker’s contract of employment will provide enhanced contractual rights when it comes to paid holiday.

 

How does paid holiday work in the UK?

 

Statutory paid holidays start to accrue from day one, where employers can adopt a leave year or accrual system to work out how much leave staff should get and how this builds up.

When using a ‘leave year’, the employer should tell their staff the dates as soon as they start working, for example, a statutory leave year might run from 1 January to 31 December. This then represents the timeframe during which workers must take their paid holidays. Where a worker starts their job part-way through a leave year, they will only be entitled to part of their total annual leave entitlement for the current year. The amount of paid holiday they will be entitled to for that year will therefore depend on how much of the year is left. There is an online tool at GOV.UK to help calculate holiday entitlement for someone starting or leaving part way through the year, or for someone whose job both started and finished part way through a leave year, based on the number of days or hours worked.

Alternatively, an employer can use an ‘accrual system’ to calculate a worker’s leave during their first year on the job. Adopting this system, a worker should get one-twelfth of their leave in each month. For example, if someone works a 5-day week, and is therefore entitled to 28 days paid leave a year, they should get 7 days leave after their third month in the job. This represents a quarter of their total annual leave entitlement (or 28 ÷ 12 × 3).

Importantly, however, regardless of how accrued holiday is calculated, this should not be affected by a worker being on sick leave or any other form of statutory leave, such as maternity or paternity leave, shared parental leave and adoption leave.

 

What is a ‘use it or lose it’ holiday policy?

 

The basic principle of statutory annual leave entitlement is that this will be lost if it has not been used. There are some exceptions to this rule, but usually the annual leave accrued in any leave year must be used in that same year. This is important because taking time off work helps staff to get sufficient rest breaks, and to keep physically and mentally healthy. However, it may not always be possible for workers to use their full entitlement in time. The question is, therefore, how an employer should deal with any accrued but unused days.

Where an employer chooses to adopt a ‘Use it or lose it holiday policy UK’ approach, unless they refuse to allow or make it impossible for leave to be taken, any unused accrued holiday will normally be lost at the start of a new leave year. The only other exception to the ‘use it or lose it’ rule is where the worker has been prevented from taking their full annual leave entitlement because they have been on some other form of statutory leave.

If a worker has been on long-term sick leave, they can carry over the first 20 days of their 28 day entitlement on their return to work, whilst a worker who has been prevented from taking some or all of their paid holiday due to maternity or family leave, they can carry over up to one years’ statutory entitlement (5.6 weeks or 28 days) into the following year.

Importantly, however, in the case of Smith v Pimlico Plumbers Ltd [2022] EWCA Civ 70, the Court of Appeal made it clear that in order for a worker to lose their right to paid leave in any given leave year, the following three conditions must be met:

 

• the worker must have been given the opportunity to take paid annual leave
• the worker must have been encouraged to take paid annual leave, and
• the worker must have been informed that the right to paid leave would be lost at the end of the leave year, if not taken during the leave year in which it was accrued.

 

This effectively means that, regardless of what any holiday policy states, any accrued leave will not automatically be lost — unless the employer has pro-actively brought it to the worker’s attention that this would be the case, and the worker is not only given the opportunity to take paid leave, but is positively encouraged to do so. In other words, the employer must have exercised all due diligence in ensuring that leave is taken in time.

Importantly, employers cannot rely solely on a ‘use it or lose it’ policy. They must act proactively by regularly reminding employees of their entitlement and clearly explaining any deadlines. For example, issuing reminders via email or payslips can demonstrate compliance.

 

Pros & cons of a ‘use it or lose it’ policy

 

From an employer’s perspective, and provided they follow the guidance from the Court of Appeal in Smith v Pimlico Plumbers, there are various benefits in adopting a ‘Use it or lose it holiday policy UK’, where they are also proactively reminding employees of their entitlement and clearly explaining any deadlines.

The most obvious benefit is that if a worker fails to take accrued holidays by the end of the annual leave year, these will be lost, potentially resulting in significant savings for the business. This ‘use it or lose it’ approach can also help to maintain consistent staffing levels, where workers will not be permitted to accrue large chunks of carried-over leave.

However, there are also various drawbacks to not allowing staff to carry over unused leave, not least the fact that where people have been working hard on behalf of the business, prioritising work over taking a break, this can lead to low morale and employee burnout. This in turn, can lead to increased absenteeism and cost to the business, together with the potential to leave staff feeling disgruntled for being penalised for their hard work and dedication.

A ‘use it or lose it’ holiday policy can also lead to multiple or surges in requests from staff to take annual leave at the same time towards the end of the leave year. Even though a worker must generally take their annual leave when it is convenient to the employer, and a request for leave can be refused during busy periods, the employer cannot prevent an employee from taking their full leave entitlement. This can therefore present unwanted operational challenges, where either the employer will not be able to accommodate all of the leave requests within the current leave year or they will be left short-staffed whilst several staff are on annual leave.

 

Alternatives for unused holiday

 

A ‘Use it or lose it holiday policy UK’ is a type of annual leave policy adopted by many UK-based employers for dealing with any accrued but unused entitlement to annual leave. However, for some employers, offering a more attractive holiday policy can pay dividends in the long run when it comes to keeping their workforce happy and healthy.

There are two main alternatives to the ‘Use it or lose it’ approach: allowing staff to carry over a number of unused days or paying them in lieu of any unused holiday.

 

Carrying over unused holiday into the following year

 

If a worker is entitled to the statutory minimum of 28 days leave, they can carry over a maximum of 8 days with the employer’s agreement. If a worker gets more than 28 days leave, the employer may also allow them to carry over any of this additional contractual entitlement. The employer should therefore decide the number of days that can be carried over into the following leave year, and make provision for this in the employment contract.

Alternatively, the employer can leave the decision to carry over any unused days at its discretion, for example, on individual request and on a case-by-case basis.

Remember that for contractual leave (holiday beyond 5.6 weeks), carry-over rules are determined by the employment contract or workplace policy.

 

Paying in lieu of any unused annual leave entitlement

 

There is no automatic right for a worker to be paid for unused holiday leave. Workers are only entitled to payment in lieu of unused holiday on termination of their employment. However, if an employer offers more than 28 days annual leave under the contract of employment, they can agree separate pay arrangements when it comes to this additional leave. This means that the employer can choose to pay staff for any unused contractual leave, either as a matter of course or in exceptional circumstances at their discretion.

 

If an employee doesn’t use all of their holiday entitlement

 

If an employee doesn’t use all of their holiday entitlement, what happens largely depends on their employment contract terms and the holiday policy in place. Under the Working Time Regulations 1998, all employees are entitled to 5.6 weeks of paid annual leave per year (including bank holidays). Also, employers cannot assume leave is lost simply because a worker did not take it. They must show evidence of compliance with the Smith v Pimlico Plumbers principles.

Employers can enforce a “use it or lose it” policy, meaning unused statutory leave will be forfeited at the end of the holiday year unless they were unable to take it due to exceptional reasons, such as illness.

So while statutory leave can be carried forward for reasons such as sickness or maternity, employers should have clear policies to distinguish between genuine inability to take leave and simple failure to plan holidays.

Generally, statutory leave cannot be carried over to the next year unless your contract or workplace policy allows it. However, if you couldn’t take leave due to long-term illness, the individual may carry up to 4 weeks of leave into the next holiday year.

If the employer offers extra leave above the statutory minimum, the rules for unused holiday depend on the employment contract. The employer may allow carryover, forfeiture or pay in lieu for unused days.

 

Best practice for employers

 

When deciding what holiday policy to adopt in the workplace, economic factors are important, but maintaining a happy and healthy workforce is equally as important. People are often the best assets of a business, where ensuring the physical and mental wellbeing of staff is not only a basic statutory duty imposed on employers, but will also help to increase employee engagement, and to reduce absenteeism and staff turnover rates.

By incorporating a degree of flexibility into any holiday policy, by allowing workers to carry over some of their accrued but unused holiday, this can help to support staff in maintaining a healthy work/life balance, and getting the rest and relaxation that they need. Alternatively, by compensating staff for unused leave, this can prevent the workforce from feeling disgruntled. However, where a ‘lose it or use it’ policy is adopted by a business, the following best practice tips can help to ensure that this policy is fair, lawful and effective:

Set out the policy clearly within any contract of employment or signpost the employee to an easily accessible policy, for example, on the staff intranet. The policy must set out the worker’s entitlement to paid leave, whilst making it clear that this must be taken during the leave year in which it is accrued, otherwise the right to paid holiday will be lost.

Periodically remind staff that they should be submitting requests to use any remaining annual leave entitlement. By sending out company-wide communications, this can prompt workers with unused holidays to book time off, in this way encouraging all members of staff to use all of their annual leave entitlement before it is lost. Employers should also ensure that staff have easy access to a cloud-based or computerised system that allows them to check their leave entitlement and how much they have remaining.

Try to agree to annual leave requests where at all possible. Even though employers have the right to refuse an annual leave request, for example, during busy periods, they must endeavour to accommodate requests where at all possible, so that workers have the opportunity to take their full leave entitlement before the end of the leave year.

Importantly, if the three conditions as set out by the Court of Appeal in the case of Smith are not met — that the worker was given the opportunity ‘and’ encouraged to take paid annual leave, plus informed that the right would be lost at the end of the leave year if not taken — the net effect is that the right to paid annual leave does not lapse. Instead, this will carry over and accumulate until the termination of their contract of employment. This means that if a worker resigns, or even if they are dismissed or made redundant, they may be entitled to claim for any accrued unused holiday over the course of their employment.

 

Need assistance?

 

For guidance on a specific employment issue such as holiday entitlement and the rules on paid leave, speak to our experts today.

 

Use it or lose it holiday policy FAQs

 

What is a ‘use it or lose it’ holiday policy?

A ‘use it or lose it’ holiday policy means employees must take their annual leave within the current leave year or risk forfeiting any unused days. This approach is legal, but employers must comply with specific rules to ensure fairness.

 

Can employers automatically forfeit unused holiday?

Employers cannot automatically take away unused statutory holiday. The Court of Appeal in Smith v Pimlico Plumbers clarified that employers must give employees the opportunity to take leave, encourage them to do so, and clearly inform them that unused leave will be lost.

 

What steps must employers take to comply with the law?

Employers must inform employees of their annual leave entitlement, encourage employees to take their leave within the leave year and clearly state that any untaken leave will be forfeited if not used in time.

 

What happens if an employee cannot take their leave due to illness?

If an employee is unable to take leave due to long-term illness, they are allowed to carry over up to 20 days (the EU minimum) of statutory leave into the next holiday year.

 

Does the ‘use it or lose it’ rule apply to contractual leave?

The rules for contractual leave (holiday offered beyond the statutory 5.6 weeks) depend on the employment contract or company policy. Employers can decide whether unused contractual leave can be carried over.

 

What if an employee is on maternity or family leave?

Employees on statutory leave, such as maternity, adoption, or shared parental leave, are entitled to carry over any unused statutory holiday into the next leave year.

 

How should employers communicate a ‘use it or lose it’ policy?

Employers must proactively remind employees about their entitlement, the deadline for taking leave, and the consequences of not using it. Written reminders, such as emails or notices, help ensure compliance.

 

What risks do employers face if they fail to comply?

If employers fail to inform or encourage employees to take their leave, they may be required to allow carry-over of unused holiday, potentially leading to claims for unpaid leave or breaches of the Working Time Regulations.

 

Can employees be paid for unused statutory holiday?

Payment in lieu of untaken statutory holiday is not allowed during employment. However, if an employee leaves the company, they must be paid for any accrued but unused holiday.

 

How can employers encourage staff to use their leave?

Employers can encourage regular breaks by promoting a healthy work-life balance, issuing timely reminders, and addressing workload concerns that might prevent employees from taking their leave.