In this month’s article we explore the basic fundamentals of Managing Annual Leave (AL). AL can be a complex area, and indeed we could publish an article alone on calculations. However today we will retain focus on a key area often underappreciated, that is the need to proactively manage annual leave within your organisation. You may have seen a recent tribunal case via your professional channels or in the media, which provides us with a stark reminder of how wrong it can all go, lets explore what learnings we can take from this;
“Property Manager Awarded £400k after 25years of unused Annual Leave!”
Rules initially brought in under the Working Time Regulations 1998, ensure that almost all people classed as employees or workers are legally entitled to 5.6 weeks’ paid holiday a year (known as statutory leave entitlement or annual leave), which is equivalent to 28 days for a 5 day week, full time contract. If an worker / employee works part-time or irregular hours, they are still entitled to annual leave on a pro-rata basis.
An employer can include bank holidays as part of statutory annual leave, or they can give them in addition to the 5.6 weeks.
Employers can also choose to offer more leave than the legal minimum (statutory), this would be termed Contractual annual leave. Interestingly, they do not have to apply all the rules that apply to statutory leave to the extra (contractual) leave. For example, a worker might need to be employed for a certain amount of time before they become entitled to it.
We will explore some of the other differences in statutory and contractual annual leave a little later.
When speaking of Statutory annual leave, there are no circumstances when it can be paid to employees in Lieu of them taking it, except for upon termination of employment. At this time, all accrued but untaken annual leave entitlement should be paid to the employee in their final pay.
Neither employers or employees can “contract out” or make an agreement to be paid statutory annual leave as opposed to actually taking it. This leave is required as an element of rest time within the Working Time Regulations, for Health & Safety reasons.
Continuing with Statutory annual leave, it is important to know that no 2 types of statutory leave can be paid at any one time. For example am employee cannot be paid statutory annual leave at the same time as statutory maternity pay or statutory sick pay.
Contractual annual leave has some differences. Enhanced annual leave, that is over and above statutory – can be treated differently. In this respect, contractual annual leave can be paid to employees in lieu of them taking it, however the ability to avail of this option, must be explicitly detailed within the employment contract.
Equally, you may be familiar with the concept of “buying & selling holidays” as a perk or benefit within workplaces. In line with the above, whilst there may be an opportunity or scheme which allows employees to sell a portion of their leave, this can never be inclusive of statutory annual leave. That is, they must take the statutory 5.6weeks (for full time employee) at a minimum. (Another flag in this area will be National Minimum wage when making deductions for the “buying of holidays” but that is for another day).
In referencing back to our earlier article at the beginning, already we can see a failure to follow statutory employment law;
Lastly, what you might call an avoidable failing, the company in question did not specify any differences relating to contractual annual leave within the employees contract of employment. This at least would have reduced their historic culpability from 40 days per year owed, to 28 days per year.
To an extent – yes. However, there are some big caveats to that yes.
If we look first to contractual annual leave, this only needs to be paid upon leaving employment (terminating contract) if the accrual is not restricted via the contract of employment. That means, accrued but untaken contractual leave can be lost upon termination if it is explicitly allowed for within contract. Similarly, contractual annual leave can be exempt from carry over into a new year, if explicitly allowed for within contract.
However, statutory annual leave has much less flexibility. In order for employers to maintain a policy of “use it or lose it” relating to year end, they will need to be able to clearly demonstrate that employees had every opportunity to take their leave.
Indeed in this situation, it must also be explicitly detailed within their contract of employment that there is a risk they may lose it if untaken. Policy wording needs to be clear, and ensure it does not discriminate on any of the protected grounds.
The risk in this approach is the need to demonstrate that employees had full opportunity to take their statutory leave. This would relate to refused requests, but also evidence of proactive encouragement on the use of leave, which can sometimes be quite difficult to stand over rigidly.
It is important to note here that employees should never lose their entitlement to statutory leave if they have been or are on a period of statutory leave, and therefore couldn’t take annual leave, the law states that you must be allowed to carry this leave over. If you recall, no two types of statutory leave can be taken simultaneously, therefore their opportunity to take leave is limited. The risks here relate not only a claim for unlawful deduction of wages (lost annual leave), but also potentially a discrimination claim, if it relates to an perhaps an employee on maternity leave (Sex discrimination) or sick leave (disability disability).
Another key risk to be aware of, aside from not only a claim in tribunal for unpaid AL and / or discrimination, is the potential of receiving a penalty, or prosecution from the H&S Executive should an employee be able to demonstrate the inability to take statutory annual leave has impacted their health or caused an injury.
Reverting again to the article we opened with, the employee here was able to demonstrate over 200 refused annual leave requests, which would have challenged any policy on “use it or lose it”, even if explicit within his contract of employment.
There are the less obvious costs, not only in making a tribunal defense, but also in terms of reputational damage.
If we consider the direct costs, these can ultimately be unlimited. Here we have seen a payout of almost £400k, and that is without any supplementary claims regarding discrimination for example, an award which carries no financial cap.
It is important to note that in Northern Ireland, there is also no backstop on back dated claims relating to unlawful deductions form wages. Whilst tribunal time limits exist regarding making an initial claim, the historic reach is not restricted. In reality, calculations for entitlements can go back to the introduction of the working lime regulations in 1998.
Differently, in Great Britain legislation introduced in 2014 under Limitation regulations capped the reach of such tribunal claims at 2 yrs. However, interestingly this limitation legislation was recently ruled unlawful by a tribunal. You will also note that in the case we have focused on for this article, (based in Great Britain) the financial award certainly went beyond the proposed 2 year limit.
Therefore, neither GB or NI can truly rely on a cap, or limitation to mitigate financial impacts relating to unpaid Annual leave entitlements.
Therefore, Managing and Monitoring AL is only becoming more important, not only for business and financial efficiency but also to comply with expanding legal requirements.
The Employment Rights Act 2025, which came into effect in April this year, introduces new obligations on employers to maintain adequate records of annual leave and holiday pay entitlements, the purpose of which is to ensure workers and employees are receiving what they are entitled to.
Other key tips for management of AL include;
People Management Solutions can provide advice and support to assist in Managing Annual Leave within your organisation. If you have any queries regarding Annual Leave Entitlement, or require any assistance in this area, please do reach out to us.