It is important 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.
How many paid holidays should UK workers get?
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.
Employers must 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. Alternatively, an employer can calculate a worker’s leave based on them receiving one-twelfth of their leave each month.
Importantly, 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.
Where an employer chooses to adopt such a policy, 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: sickness or family 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 (for up to 18 months), whilst a worker who has been prevented from taking some or all of their paid holiday due to maternity or family leave, can carry over up to one years’ statutory entitlement (5.6 weeks or 28 days) into the following year.
Importantly, however, in the recent decision of Smith v Pimlico Plumbers Ltd [2022] 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.
Pros and 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:
• significant savings for the business.
• ability 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:
• low morale and employee burnout.
• increased absenteeism.
• cost to the business.
• multiple surges in requests to take holiday at the end of the leave year.
Carrying over unused holiday into the following year – a specified amount or on discretion.
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.
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.
If a ‘use it or lose 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.
• periodically remind staff that they should be submitting requests to use any remaining annual leave entitlement before it is lost.
• ensure 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.
Importantly, if the three conditions as set out by the Court of Appeal in the case of Smith v Pimlico Plumbers are not met then the net effect is that the right to paid annual leave does not lapse and regardless of the workplace policy, that employee will be able to carry over their holiday into the next holiday year.
Holiday calculations are often challenging! For any assistance please email nicola.goodridge@goodhr.co.uk or call +44 7917 878384
