13 December 2024
How does unused holiday pay work?
What happens to unused annual leave? What are the implications for employers? These questions can get complicated quickly, and when it comes to a subject as vital as employees getting breaks, finding the right answers is critical.
What is unused holiday pay?
Simply put, every employee is entitled to a statutory amount of annual leave.
As long as you follow the law (we’ll go into the details there later) and don’t prevent an employee from taking their leave, unused annual leave effectively disappears from the record and can’t be used. This keeps things simple, but employees can often find this frustrating.
A ‘leave year’ is the term that describes the period an employer expects an employee to take their annual leave. For some companies, this is between the 1st of January and the 31st of December. Others may have the leave year start in April to coincide with tax season.
The law on paid holidays in the UK
The vast majority of workers in the UK are entitled to 5.6 weeks of statutory paid holiday a year. This entitlement is accrued from the day an employee starts a job. It is also earned when the employee is in their probationary period, on sick leave, or any kind of parental leave.
Public holidays can be counted as part of these 5.6 weeks, or separately.
No matter how many hours an employee works, they will not automatically be entitled to more than 28 days of holiday a year.
For the most part, you cannot pay an employee in lieu of giving them time off. The exception to this is if an employee leaves and still has entitlement left, or if you have a policy that allows employees to buy or sell holiday time. You must ensure this does not take an employee under the minimum statutory requirements.
Paid holiday rights for part-time workers
Things get a little more complicated for part-time workers, but you can work out their entitlement simply by multiplying the number of days they work a week by 5.6. Alternatively, you can use the UK government’s holiday entitlement calculator!
Note that if you offer your full-time employees more paid leave than the legal minimum, this also needs to be offered to part-time employees as well. A common example of this is giving someone an extra paid day off on their birthday.
There are also rules for employees who work irregular hours. In this case, they accrue holiday at 12.07% of the hours they work in a pay period at the end of that pay period. Part hours that are less than 30 minutes are rounded down but rounded up if they are more than 30 minutes.
For example, an employee who works for 80 hours in July, and is paid on the last day of the month will accrue 9 and a half hours. This gets rounded up, so they earn 10 hours of holiday that pay period.
‘Use it or lose it’ policies
As a rule, any leave earned in any given leave year should be used in the year it was earned. This is vital to ensure employees are getting sufficient rest. Without this, employees can quickly find themselves suffering from burnout.
Employees can sometimes be reluctant to take their earned time off for a number of reasons. Sometimes this can come down to decision paralysis. Sometimes it can be because they feel they’ll be judged for taking time off. It can even be because they feel they have too much on and taking time off will cause workload issues. This often comes down to poor workforce management.
While allowing employees to rollover their time off to the next year offers some flexibility, it can often mean these issues are not addressed at the root. Actively encouraging employees to use their required time off can help reduce burnout. Train managers to notice when this is happening and have them factor annual leave into their plans. Check-ins can help with this.
Some employers offer a courtesy period of around three months after the start of the new leave year for exceptional circumstances, such as prolonged sickness absence that prevented them from taking leave. Again, this should be clearly outlined in your policy documents.
Managing unused holiday pay
When it comes to best practice, the first and most important consideration is clear communication. Whatever policy you use, make sure new hires are made aware of it during their onboarding, and make it easy to find this information throughout the year. Using a central HR platform to send out automatic reminders to employees who aren’t using their leave is also handy.
If you’re going to make use of a ‘use it or lose it’ policy, you need to make sure that you don’t prevent an employee from taking their legal leave entitlement.
For example, you might have a particularly busy time of year when you typically refuse leave requests. But if that time comes and an employee still hasn’t used their leave, you can’t prevent them from taking time off. This can lead to huge logistical issues if this happens to several employees, often leaving you very understaffed.
As a rule, you should aim to agree to annual leave requests whenever possible. While you have the right to refuse requests as an employer, this can lead to resentment building up. Again, setting up expectations early of when leave requests should be made, when they shouldn’t and offering compromises is key. Otherwise, the employee/employer relationship can quickly turn toxic.
Annual leave is an important part of an employee's compensation for their work. Without it, stress can quickly mount, which leads to all kinds of problems for you and them. To learn more about how the employee experience can impact every part of your organisation, take a look at our guide.