For most of us, the idea of not taking every day of annual leave we’re entitled to is absurd. We dream of those precious days off, whether it's for a relaxing holiday, catching up with friends and family, or simply recharging our batteries. But we all know someone who usually ends up with unused holiday days as the year draws to a close.
Out of those who don’t take all their holidays, some will have innocent reasons. Some might lose track of time or feel like they didn’t get a chance due to workload. Others might be holding out for a big December payday, banking on getting paid in lieu of holiday. They might see it as a way to boost their earnings, especially around the expensive holiday season.
But the idea of giving holiday pay in lieu of actual time off is fraught with problems – not least of which the fact it means people aren’t taking enough time off throughout the year, and the benefits that come with it. Think about it, holidays aren't just about escaping work, they're vital for your wellbeing!
Regular breaks help reduce stress, improve mental health, boost creativity, and even increase productivity in the long run. When employees consistently give up their holiday time, they risk burnout, decreased job satisfaction, and even health issues. This becomes an issue in the long run, as a tired and stressed workforce is rarely a productive one.
We’re here to talk through the problems with offering payment in lieu of holiday, and explain the best ways to deal with unused holiday allowance. We'll look into the reasons why payment in lieu of holiday can be detrimental, explore any legal implications, and offer practical strategies for encouraging employees to take their well-deserved time off. We’ll also look at some creative alternatives to paying in lieu.
What is payment in lieu of holiday?
Simply put, it's when an employee receives cash compensation instead of taking the actual time off they're entitled to. Instead of booking a relaxing getaway or enjoying a long weekend, they get extra money in their paycheck. This usually happens at the end of a holiday year when an employee has accrued unused holiday.
Sometimes, employees might actively request payment in lieu, seeing it as a way to earn extra cash, especially towards the end of the year. They might be saving up for something special, dealing with unexpected expenses, or simply prefer the money over taking time off.
Other times, employers might offer payment in lieu, to incentivise employees to work during busy periods or to reduce the administrative burden of managing large amounts of accrued holiday time.
While it might seem like a win-win situation, the employee gets extra money and the employer avoids staffing shortages, there’s a bit more to it. As we've already touched upon, consistently opting for payment in lieu can have negative consequences for employee wellbeing and productivity.
Also, depending on the specific employment laws in your region, offering or accepting payment in lieu might not even be legal. It's pretty important to understand the legalities surrounding holiday entitlement and payment in lieu to stay compliant and avoid potential legal issues.
So, in short, here's a quick summary of what we’ve just covered:
- Payment in lieu is basically getting cash instead of your actual holiday time.
- People might want it for a quick cash boost, or bosses might offer it to keep things running smoothly when it's busy.
- While it sounds easy, ditching all your holidays for money isn't always a good shout, and it could even land you or your boss in hot water depending on where you are.
Annual leave rights
Full-time employees in the UK are entitled to a minimum of 28 days of statutory paid annual leave. This number is calculated based on the statutory minimum of 5.6 weeks of holiday entitlement (including Bank Holidays), which means if you work fewer hours, you get less time off.
For part-time workers on a fixed number of hours each week, calculating annual leave entitlement is as simple as multiplying their number of weekly working days by 5.6. That means someone who works three days a week is entitled to:
3 x 5.6 = 16.8 days’ holiday a year
Calculating holiday entitlement for casual workers (or those on zero hours contracts / irregular hours) is slightly more difficult. It involves getting an average of their working days over a 52-week period. You’d then use that average as the basis for what 5.6 weeks off actually means in terms of paid holiday.
Can you provide payment in lieu of holiday?
The question of whether you can provide payment in lieu of holiday is a tricky one, and the answer isn't always straightforward. While it might seem like a simple transaction -extra cash for the employee, less time off to manage for the employer - the legalities surrounding holiday pay is complicated and differs depending where you are.
Simply put, no matter how much statutory holiday entitlement someone has, The Working Time Regulations 1998 are clear that it ‘may not be replaced by a payment in lieu, except where the worker’s employment is terminated’.
Even if it seems like a good deal for both parties, allowing payment in lieu of holiday creates more problems than it solves. The most obvious downside is it’s an incentive to save a certain amount of holiday days. If someone would rather have the money than a day off, they’re likely to avoid taking their annual leave, even if they need it. This can result in burnout, which nobody benefits from.
The fact of the matter is statutory holiday allowance is designed specifically to give employees paid time away from their working environment to relax and recharge. Undermining the law by offering pay in lieu of holiday risks their health and wellbeing, as well as overall productivity.
Imagine a scenario where you have an employee who’s struggling financially, and they decide to constantly choose to get paid out for leave not being used. This could lead to exhaustion, stress related illness, lack of productivity and an overall drop in work performance. Do you or they benefit from this?
It’s worth noting this only applies to statutory holiday allowance. For any holiday allowance you offer above and beyond the legally required 5.6 weeks, you can allow payment in lieu if you think it’s a good idea.
You may be able to offer payment in lieu for this extra holiday allowance, although you should still do so with caution and consider the potential impact on employee wellbeing. Don't assume that just because it seems like a mutually beneficial arrangement, it's automatically legal. Getting it wrong can be costly.
Here is another quick summary for you:
- Legally, you can't just pay someone off instead of giving them their minimum holiday. The law's pretty clear, holidays are for actual time off, not cash.
- If you let people swap holidays for money, they may work themselves into the ground, which is bad for everyone. Burnout's a real thing, and it's not worth the short-term gain.
- You might be able to pay for extra holiday time beyond the legal minimum, but tread carefully. Just because it seems okay doesn't mean it is, and you could still end up in a legal mess.
Can leftover holidays be carried forward?
So, you know that encouraging employees to take their holiday is important, but what happens when life gets in the way, and they end up with unused days at the end of the year? Can they just carry them over? The rules around carrying over holiday can be a bit confusing, so let's break it down.
The Working Time Regulations are quite clear on this too, saying annual leave ‘may only be taken in the leave year in respect of which it is due’. This sounds pretty straightforward, right? Use it or lose it. However, like most things legal, it's not that simple.
This only applies to the four weeks of leave mandated by the EU Working Time Directive, which still applies after the UK left the European Union. So, these four weeks, generally speaking, can't be carried over.
But what about the rest of the statutory holiday allowance? In the UK, the total statutory allowance is 5.6 weeks. That means there's an additional 1.6 weeks that aren't covered by this strict "use it or lose it" rule.
These 1.6 weeks can usually be carried over into the next holiday year, at your discretion as an employer. You can set your own company policy on this, specifying how much can be carried over, and perhaps even put a time limit on when it needs to be used by.
How about one final summary?:
- Legally, those first four weeks of your holiday, you have to use them. No rolling those over, end of story.
- That extra 1.6 weeks of holiday you get in the UK? That's a bit more flexible. Your boss gets to decide if you can carry it over, how much, and for how long.
- Basically, it's a "use it or lose it" for the main bit, but the rest is up to your employer.
Payment in lieu of holiday at the end of employment
The rules around payment in lieu of holiday are slightly different when someone’s employment is coming to an end. This is the one scenario where payment in lieu becomes not only allowed but often required. When an employee leaves a company, the employee’s final pay will include any accrued untaken holidays and any relevant extras (redundancy pay, etc).
This applies whether the employee resigns, is made redundant, or is dismissed. It's a legal entitlement, and it's important to calculate it correctly. So, how do you determine how much holiday pay an employee is entitled to when they leave? You can use the following calculation:
(A x B) - C, where:
- A is their holiday entitlement for the full year
- B is the proportion of the year that’s gone by the time of leaving
- C is the amount of leave already taken
By plugging these values into the formula, you can calculate the number of days of holiday the employee has accrued but not yet taken. This is the amount they should be paid for in their final pay.
What to do if people don’t take annual leave
For the health and wellbeing of your team the best thing you can do is encourage them to take the paid leave they’re entitled to. That includes all types of appropriate time off like parental leave, sick leave, public holidays and so on. But primarily, we’re talking about their minimum holiday entitlement at least.
Here are some ways you can try:
- Make it very clear to people joining the business what their holiday allowance is
- Regularly communicate with everyone how much holiday they have left to take (every quarter, perhaps)
- Check in with anyone who has large amounts of unused holiday to see if there’s a reason they’re not taking it
- Make approving holiday requests easier by using an online staff leave planner
- Implement incentives for taking holiday leave
- Manage your workloads so nobody feels guilty about taking contractual holiday allowance during a busy period
We’ve recently launched Timetastic Pro which includes the unique Burnout Board. The Board helps shine a light on those not taking enough time off work for R&R, to help you identify who’s at risk, who might have a large number of days left, and who’s in danger of overworking. A well rested and fresh team is definitely your most successful team.