Use it or Lose it Holiday Policy: Employers’ Guide

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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.

In this guide for employers, we explain the rules on holiday entitlement and how holiday pay works in the UK. 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 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.

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 UK’?

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 recent decision 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.

 

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’. 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.

 

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.

 

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?

As HR specialists, we can assist if you have any queries relating to holiday entitlements. In addition, through our fixed-fee employment service, Triple A, employers benefit from unlimited access to legal advice from our employment law experts. For guidance on a specific employment issue, or to find out more about Triple A, speak to our experts today.

 

Use it or lose it holiday policy FAQs

What happens if I don't use all my holiday entitlement UK?

If you don't use all of your annual holiday entitlement during a leave year, whether or not any of this can be carried over into the following leave year will depend on the terms of your employment contract.

Can I pay staff for untaken holiday?

An employer can opt to pay staff for any additional annual leave to which they are entitled, over and above any statutory holiday entitlement, although normally an employer would only make payment in lieu when the employee leaves.

Can my employer tell me when to take holiday UK?

An employer can tell their staff when holidays must be taken, although they must give twice as much notice as the days the worker is required to take.

Last updated: 9 November 2022

Author

Founder and Managing Director Anne Morris is a fully qualified solicitor and trusted adviser to large corporates through to SMEs, providing strategic immigration and global mobility advice to support employers with UK operations to meet their workforce needs through corporate immigration.

She is a recognised by Legal 500 and Chambers as a legal expert and delivers Board-level advice on business migration and compliance risk management as well as overseeing the firm’s development of new client propositions and delivery of cost and time efficient processing of applications.

Anne is an active public speaker, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals

About DavidsonMorris

As employer solutions lawyers, DavidsonMorris offers a complete and cost-effective capability to meet employers’ needs across UK immigration and employment law, HR and global mobility.

Led by Anne Morris, one of the UK’s preeminent immigration lawyers, and with rankings in The Legal 500 and Chambers & Partners, we’re a multi-disciplinary team helping organisations to meet their people objectives, while reducing legal risk and nurturing workforce relations.

Legal Disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct at the time of writing, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

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