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Annual Leave

All employees are entitled to a minimum of 5.6 weeks’ paid annual leave, which can include bank holidays (equating to 28 days for a full-time employee). 

Part-time employees receive an equivalent entitlement, calculated on a pro-rata basis. 

A week’s leave should allow employees to be away from work for a week.  It should be the same amount of time as the working week. 

For example:

  • If an employee works a five-day week, they are entitled to a minimum 28 days’ paid annual leave.
  • If an employee works a four-day week, they are entitled to a minimum 22.4 days’ paid annual leave.
  • If an employee works a three-day week, they are entitled to a minimum 16.8 days’ paid annual leave.
  • If an employee works a two-day week, they are entitled to a minimum 11.2 days’ paid annual leave.
  • If an employee works a one-day week, they entitled to a minimum 5.6 days’ paid annual leave.

The statutory holiday entitlement is capped at 28 days, so an employee who works a six-day week would still only be entitled to a minimum of 28 days’ paid annual leave.

When calculating the amount of annual leave an employee is entitled to in a year, partial days of holiday need not be rounded up to the nearest half or full day.

The entitlement to paid annual leave begins on the first day of employment. 

However, during the first year of employment the proportion of the leave that can actually be taken (with the employer’s agreement) builds up over the year.  The amount of leave that can be taken builds up monthly in advance at the rate of 1/12th of the annual entitlement each month.  Where this calculation does not result in an exact number of days, the amount of leave that can be taken is rounded up to the next half-day. 

There is an implied duty on employers to ensure employees take their leave entitlement.  There is no right to carry over the original statutory minimum of four weeks’ paid annual leave from one leave year to the next (although see below in relation to carry over).  However, with the agreement of both the employer and the employee, some or all of the additional 1.6 weeks of holiday can be carried over to the following leave year.

There is no right for employers to pay wages in lieu of any untaken holidays (unless the employee is leaving – see below). 

The holiday year

The leave year can be determined by written agreement between the employer and the employee.  It is usual for an employer to specify a holiday year in an employee’s contract of employment, for example, the calendar year (1 January to 31 December).  If you do not have an agreement, it will start on 1 October if the employee started work on or before 1 October 1998 or on the date the employee started employment if they started after 1 October 1998.

If an employee starts work part-way through an employer’s contractual holiday year, the employee’s leave entitlement will be proportionate to the amount of time left of that holiday year.

For example:

The employers contractual holiday year runs from 1 January to 31 December.  The employee is employed to work a five-day week and commences his employment on 1 July.  His holiday entitlement for the remainder of that holiday year will be 14 days (annual entitlement of 28 days multiplied by 6/12th equals 14 days).

Calculating entitlement for part-time employees

Employers cannot treat a part-time employee less favourably than a full-time employee and therefore the part-time employee need to be allowed the equivalent entitlement to annual leave, calculated on a pro rata basis in accordance with the hours they work.

Where an employee works part-time there is a chance that they may not work on the days when some of the bank holidays fall. The easiest way to deal with the bank holiday is to pro rata the entire holiday entitlement (including any bank holiday allowance) and deduct days for any bank holidays which fall on days worked.

Example:

An employee works 3 days a week – Monday, Tuesday, Wednesday. The company gives full-time employees 5.6 weeks' holiday entitlement, including bank holidays. The company observes the bank holidays and employees are paid for the time off.

The employee has a pro rata holiday entitlement of 5.6 weeks x 3 days worked a week = 16.8 days including bank holidays.

Where the bank holiday falls on a Monday (a normal working day for the part-time employee) the entitlement is reduced by one day and the employee receives their pay as normal. Where the bank holiday (e.g. Good Friday) falls on a non-working day, there is no deduction to make and the employee does not receive any pay for the day.

Where an employee's working hours change from full-time to part-time, or vice versa, then holiday entitlement needs to be calculated in accordance with the actual hours worked during the relevant period. Therefore, for any period where an employee works full-time their annual leave entitlement will accrue on this basis, even if this holiday is taken at a later period where the employee is working part-time, and vice versa.

Calculating entitlement for zero-hours employees

Where an employee is on a zero hours contract and paid only for the hours worked, they will still be entitled to holiday however this is on a pro rata basis.

In this situation the employee's entitlement is calculated as a percentage of hours worked. For a 5.6 week entitlement the percentage is 12.07%. The calculation used is as follows:

52 weeks less 5.6 weeks (holiday) is 46.4 weeks (working weeks)

5.6 weeks divided by 46.4 weeks is 12.07%.

Where an employer's holiday entitlement differs, the number of weeks' leave given (including bank holidays) should be deducted from 52 weeks to give the number of weeks worked. The number of leave weeks should then be divided by the number of weeks worked to give the accrual percentage.

This means that for every hour worked the employee accrues 12.07% of an hour's holiday. Therefore it takes just over 8 hours to accrue 1 hour's holiday. Where the employee wants to take their holiday they should request the specific time off and the hourly entitlement (using the employers normal working day's hours) should be deducted from the employee's accrued entitlement.

When working out what holiday pay a worker should receive for the time they take off (as opposed to the amount of holiday); the correct approach where pay varies is to base this on an average of the earnings received in the preceding 12 weeks.

Term time only employees

Term time, or part year, workers should have their holiday entitlement calculated on the basis of on a 12-week average of hours worked. Case law has demonstrated that the method of calculation set out above for zero hours employees is not appropriate for these workers.

Annual leave during long term sick absence

The effect of sickness absence on annual leave is a highly complex and much litigated area of law. Key points to be aware of include:

  • Workers on sick leave continue to accrue annual leave.
  • Workers who fall sick before or during annual leave are generally entitled to cancel that leave and take it at a later date.
  • If a worker remains sick until the end of the relevant leave year they should be permitted to carry over any remaining statutory holiday into the following leave year. Please note that there is not necessarily a right to carry over for an unlimited period of time and limits can be set by employers (case law suggests that limiting carry-over to 15 months past the end of the leave year in question will be lawful but would need to be expressly included in contractual documentation to be capable of being enforced).
  • It is possible for workers to take annual leave during sickness absence i.e. effectively designate part of the long term sickness absence as annual leave.
  • Employers cannot force sick workers to take annual leave during sickness absence. It is possible to remind workers of their annual leave entitlement and suggest or request that they take it during their long term sickness absence.
  • Workers are only entitled to statutory holiday pay if they actually take statutory holiday or give notice to their employer that they wish to take such holiday.
  • Payment in lieu of statutory holiday entitlement is only permitted on termination of employment.

It is important to note that the relevant case law on this subject relates to the 4 weeks’ paid annual leave entitlement under the European Working Time Directive, rather than the additional 1.6 weeks’ conferred on workers by the domestic legislation (The Working Time Regulations 1998) or additional contractual annual leave entitlement. However, it is likely that unless the government make changes to clarify this position the additional 1.6 weeks’ will also be protected.

For more detailed information on sickness absence please see Sickness Absence and Ill Health Overview [FS3.01].

Due to the complexity of this subject matter and the need to consider each specific case on its facts employers are advised to take legal advice in relation to matters concerning the interaction between annual leave and sickness absence.

Annual leave during maternity leave

Women are entitled to accrue contractual and statutory holiday whilst on maternity leave. Difficulties arise as an employee may be off for an entire leave year or substantial parts of two leave years.

Before maternity leave

  • An employer can encourage, or give notice to, an employee to make them take their leave entitlement before starting maternity leave.
  • Where the employee takes the leave for the remainder of the leave year before accruing it the employer risks not being able to recoup this if the employee resigns or is dismissed before the end of the leave year.
  • If the employee gives birth early then the period of annual leave ends and maternity leave begins and therefore this needs to be carefully recorded so the employee is given their full entitlement to annual leave on return.

After maternity leave

  • An employee on maternity leave can carry over the leave from the previous leave year (if not taken prior to maternity leave) including bank holidays.
  • An employer cannot pay in lieu of allowing the employee to take the leave.

Returning part-time

  • Where an employee is returning part-time and the employer wishes them to take their annual leave before their return to the office the employer need to agree with the employee whether they will take the accrued entitlement on their original hours and return sooner or whether they will take the accrued entitlement on the new hours and return later.
  • The leave for the remainder of the year will be calculated on the new hours.

Carrying over leave

It is not generally necessary to permit employees to carry over untaken leave into a new leave year, save in certain circumstances outlined below. However, a recent case has stressed that where employers are going to rely on this "use it or lose it" approach, they can only safely do so where they have "diligently" brought to the workers' attention the fact that any unused leave will be lost at the end of the holiday year if it has not been used. The obligation to demonstrate this has been done falls on the employer. Although this only applies to statutory holiday, it is good HR practice to bring any unused holiday entitlement to workers' attention in a timely manner; the employer isn’t obliged to force an individual to take holiday, but in order to reply on the principle that this will be lost if not used then this should be highlighted prior to the end of the holiday year. In order to manage holiday absence effectively this should be raised well in advance of the end of the holiday year.

Where an employee has been unable to take leave due to long term sickness or parental leave they will be entitled to carry over the leave to the next leave year. Some case law has also indicated that this could also possibly be the case where individuals are prevented from taking holiday for other reasons, for example work commitments.  However, this carry over does not need to be for an unlimited period and case law indicates that the legislation can be interpreted as limiting this to a period of 15 to 18 months following the end of the holiday year, after which time it will be lost. Employers who wish to limit carry over in this way should include specific wording on this point in the applicable policy document. Notwithstanding the ability of employers to limit carry over of holiday in this way, in circumstances where an individual is prevented from taking holiday (for example because their employer refuses to pay them for this) then in effect they have been prevented from exercising their right to paid leave and so this carries over (potentially indefinitely) until they have the opportunity to exercise it, even if that is in the form of a payment on termination of employment. In those particular circumstances the courts have indicated that there will be no ability to limit carry over. This recent conclusion may have a significant impact on certain industries where individuals have not been allowed the opportunity to take paid leave when they are in fact entitled to it (for example the recent cases on employment status in the gig economy). This is a fairly complex area of law and therefore if you have specific queries relating to this you should discuss further with your legal advisor.

Annual leave on termination of employment

On leaving employment, the employee will be apportioned days on a pro-rata basis and must be paid in lieu of any days which have accrued but which have not been taken as at the date of termination of employment.  In other words, the employee’s leave entitlement will be proportionate to the amount of the holiday year that they have worked.

Employers can include a written claw-back clause for holiday taken before it has been earned.  Such a clause would enable the employer to deduct the amount equal to excess holiday taken from any final salary payment on termination of employment.  Without such a clause, an amount equal to excess holiday taken cannot be deducted from final salary.

Payments in lieu of accrued but untaken annual leave on termination of employment must be calculated to reflect normal pay (i.e. a contractual term purporting to make a token payment in respect of accrued but untaken leave is likely to be unlawful). If there is an express contractual provision then the amount of the relevant payment must be equivalent to the pay the employee would have received if they had actually taken the annual leave during employment.

Further, if the event of a worker dying, the right to a payment for accrued holiday can be enforced by the deceased worker's beneficiaries.

Notice provisions

The Regulations specify (in the absence of any agreement to the contrary) that the employee must give the employer (and vice versa) notice to take leave, which is double the amount of the holiday taken e.g. two weeks’ holiday = four weeks’ notice.  The employer only has to give notice equivalent to the holiday taken if he wishes to refuse the employee permission to take leave requested.  As these statutory notice provisions are complicated, it is advisable for employers to have specific notice leave clauses in their contracts of employment i.e. specifying how much notice is required from either employer or employee of any request for holiday or refusal of such a request.   You can also set out in the contract of employment specific times that employees must take some of their leave, for example, during a Christmas or summer shutdown.

Other holiday pay issues

A week’s pay:

An employee is entitled to be paid for a period of annual leave at the rate of a week’s pay for each week of leave. 

If the employee’s normal working hours are the same every week and his pay does not vary with the amount of work done, the amount of a week’s pay is the amount which is payable under the employee’s contract of employment. 

Where the amount of pay varies with the amount of work done but the normal working hours do not vary, the amount of a week’s pay is the amount of pay for the number of normal working hours in a week, calculated at the average hourly rate of pay payable to the employee in respect of the previous 12 complete weeks.

Where the employee is required to work on hours of the day or at times of the week which differ from week to week (variable hours) so that pay varies, the amount of a week’s pay is based upon the average pay paid and the average number of hours worked in the previous 12 weeks.  Weeks in which the employee was not paid because he was not working are excluded and a previous working week is brought into account.

Overtime, commission and bonus payments: 

Under previous case law, commission was not normally taken into account when determining a week's pay for annual leave purposes. Similarly, where an employee has normal working hours, overtime payments would previously only be included in the calculation of a week's pay where this was fixed (i.e. compulsory and guaranteed overtime) under the contract of employment. This lead to a situation where an employee regularly working substantial amounts of overtime was paid only basic pay when on annual leave and therefore concerns were raised that the calculation of a week's pay did not reflect the reality of normal pay and therefore potentially discouraged individuals from taking holiday.

However, subsequent case law has changed this position. The European Court of Justice has held that the methods of calculating the commission element of holiday pay must be assessed by the national court on the basis of previous ECJ ruling. That means a tribunal should focus on the average commission earned over a reference period which is considered to be representative under national law. Subsequent UK case law has confirmed that commission should be included in the holiday pay calculation and you should take advice if you pay commission but do not currently include it in holiday pay.

Similarly, the EAT has held that non-guaranteed overtime (i.e. overtime that is not guaranteed to be offered but is compulsory when offered) should be included in the calculation of a week's pay. The EAT also accepted the premise that all components over and above basic salary intrinsically linked to the performance of the task should also be included, and recent case law has determined that this would also include voluntary overtime payments where these are paid with sufficient regularity and over a sufficient period of time.

Based on the most recent rulings it appears that the obligation to include payments over and above basic pay in holiday pay calculations relates solely to the 20 days annual leave provided under European legislation, rather than the additional 8 days under UK legislation. 

This has the potential to open the floodgates for claims concerning the calculation of holiday pay. Such claims are likely to include claims for backdated holiday pay. For claims lodged on or after 1 July 2015 this is limited to backdated pay of a maximum of two years. Recent case law has called into question the compatibility of this limit with EU legislation, although this remains the current legal position. It is a complex and ever changing area of law and advice should be taken when queries are raised in respect of holiday pay calculations, or where decisions are being considered to change the way in which this is calculated.

For further information on the calculation of holiday pay to include overtime payments (and overtime generally) please see:

http://www.acas.org.uk/index.aspx?articleid=4249

Workers wrongly categorised as self-employed

Case law has determined that where an individual is wrongly categorised as being self-employed, but in reality is a worker (even if they are in agreement with being labelled as self -employed for the duration of their engagement), then they remain entitled to holiday pay for the whole of their engagement as a worker and that in these circumstances carry-over will be unlimited and so there is no limit to how far back they can claim.

Rolled-up holiday pay:

The European Court of Justice has held that rolled-up holiday pay arrangements (i.e. where an employee’s hourly rate of pay is ‘rolled-up’ to include an element referable to holiday pay, so that no additional pay is then due when the employee actually takes annual leave) are unlawful and contrary to the purpose of the Working Time Directive. 

Therefore, employers still using rolled-up holiday pay arrangements should take the appropriate steps to change their holiday pay arrangements for the future.

For further guidance on annual leave and pay please see below information produced by Acas:

http://www.acas.org.uk/index.aspx?articleid=1374

This document has been created by, or on behalf of ESP Ltd, as a general document and as a guide in relation to its subject matter and has not been bespoke drafted for you or the specific circumstances in which you are looking to use it. Prior to using this document and undertaking any HR process you must consult your organisation’s own policies and procedures to ensure that you do not do anything in conflict with your own policies and procedures.  If in any doubt as to how to use this document or, if you require any legal advice, please feel free to contact ESP Ltd on 0333 006 2929 and our legal team will be more than happy to assist.  ESP Ltd will not be liable in any way for any actions undertaken by you or your use of this document unless we have been consulted regarding your use of this document as legal advisor to your business or have bespoke drafted any documentation in response to a specific support request.