Can you pay an employee in lieu of annual leave?

The question of being paid in lieu of holiday comes up often - especially towards the end of the year when you may have a number of employees with holiday still owed to them.

Understandably, you might not want them to take time off and leave you short-staffed. But that doesn’t necessarily mean you’re able to pay them instead for any holiday they haven’t taken. 

Employees’ rights to annual leave

By law, all staff, whether permanent full-time, part-time or shift/casual workers, are entitled to 5.6 weeks holiday a year, which works out at 28 days for a full-time employee.  This is inclusive of bank holidays or any other fixed closures determined by your company.

For example, you might decide to close for a week every Christmas, and this would be taken as holiday by employees. If bank holidays are included as part of the statutory minimum rather than additional, then this leaves 20 days a year holiday to be taken at a time convenient to both you and your employees.

As we mentioned above, someone working full-time five days a week would get 5 x 5.6 = 28 days holiday. Someone working part-time would get a pro-rated amount. If they worked three days a week it would be 3 x 5.6 = 16.8 days holiday (rounded up to the nearest half day). 

For casual workers, shift workers and those who have irregular hours the calculations are a little more complicated, and holiday entitlement is normally based on the average hours/days worked in the 12 weeks preceding holiday. You can use our online holiday calculator to take the headache out of it and do the sums for you.

Can you give an employee pay in lieu of holiday?

As the end of the holiday year draws to a close, you may get some employees who

On the face of it, it sounds like a win win – the employee gets some extra money and you don’t have to arrange cover while they are on annual leave. If the end of the holiday year coincides with a particularly busy period for your business it can seem doubly attractive because you really don’t want staff off. 

However, the statutory provision was designed to give employees paid time away from the work environment and there are sound health and wellbeing reasons for them to have that time. For those reasons you are not allowed to contract out of the minimum holiday entitlement by paying them instead.

Payment in lieu upon termination of employment

The only exception to the rule is when an employee is leaving your organisation. During their notice period your worker may be able to take whatever is left of their leave entitlement. However, you can offer a payment in lieu for unused holiday instead.

If you give your staff more holiday than the statutory leave, then you can agree separate arrangements for what happens with any unused additional leave. This will normally be laid out in their contract of employment or employee handbook.

What can employers do if workers aren’t using their holiday?

When you’re running a business and spinning a dozen plates at a time, it can be hard to keep tabs on who has or hasn’t used up their annual leave. However, it’s important you do because it’s very beneficial to your business.

Staff working non-stop get worn out both mentally and physically which can lead to work-related stress, reduced productivity, more work-related errors and higher staff turnover. Having an employee-friendly holiday policy in place isn’t just a good perk, it’s essential to the healthy running of your business.

Stay away from the 'use it or lose it' approach

You could adopt a hard-line approach where if staff don’t take their holiday in a leave year they lose it. However, this doesn’t exactly create a positive company culture, endear you to your staff or do much for morale.

It could even encourage them to jump ship to greener pastures where the bosses treat them more sympathetically. And worse still, it could put off other talented individuals from joining your business.

Carry over

There is no legal duty to allow your staff to carry over a certain number of days’ holiday a year. Staff must take the full EU statutory leave which is four weeks or lose it. But if they have an allowance of 28 days, you can choose to let them carry over the eight extra days (or a pro-rated amount if part-time).

The exception to this rule is where an employee is unable to take the full leave entitlement because they are either sick or on maternity leave. They can carry over up to four weeks of leave and it must be taken within 18 months.

It’s up to you whether you have a policy of allowing leave to be carried over but it can encourage staff not to take their full leave each year which can be detrimental to health and wellbeing. It can also become costly if you have a number of employees all carrying leave over and you therefore need a lot of extra cover.

However, letting them carry over annual leave in exceptional circumstances e.g. moving house, a wedding etc. to use later rather than them taking unpaid leave might be preferable. In addition, if you get to the end of the leave year and find you have lots of staff still with odd days owed, allowing them to carry them over might be easier than having them all take it at once and leave you short-staffed.

Holiday take up check-ins

The best option is to encourage employees to take holiday throughout the year. Let staff know that taking holidays is welcomed. Take time at company meetings to ask them about holidays and what they’ve done – if they know you’re interested they may be more relaxed and feel more comfortable taking them.

By regularly checking in with your employees and monitoring how much holiday they have left you can also ensure they take it at regular intervals. You can keep tabs on holiday requests and entitlement using online HR software. This can also make booking holiday much easier for your staff too.