Annual holidays are provided for in the Holidays Act 2003 and allow employees to have regular rest and relaxation time..

Entitlement to Take Holidays

Key elements of the entitlement to annual holidays are:

  1. An employee is entitled to a full four weeks’ annual holidays after they have completed 12 months’ of continuous employment.
  2. An employer can agree to allow an employee to take annual holidays in advance of this.
  3. Annual holidays are to be taken at a time agreed between the employer and the employee.
  4. An employer must not unreasonably refuse to agree to a request for annual holidays.
  5. If an employee elects to do so, their employer must allow them to take at least 2 weeks of their annual holidays entitlement in one continuous period.
  6. An employer can require an employee to take annual holidays if they are unable to agree to the timing of the holidays.
  7. An employer can require an employee to take annual leave during a closedown period (where the employer closer its operations or discontinues the work of one or more employees).

Payment for Holidays

Annual holidays must be paid at whichever rate is the higher of either the employee’s ordinary weekly pay at the start of the leave, or the average amount of weekly earnings for the 12 months prior to the holiday.

Large annual holidays accruals are not only costly for employers but represent a missed opportunity as regular leave use is a great way to gauge staff performance, and additionally unrested employees can be a health and safety risk in the workplace. Whilst circumstances do exist where employees can be directed to take leave (as set out above), creating a culture where employees access their leave regularly can assist with staff retention.

Unless company policy restricts this, an employee can apply in writing to “cash out” a maximum of one week’s annual leave per year. This can be done in a single amount or in smaller amounts provided no more than one week’s holidays per year is cashed out.  An employer must consider the request within a reasonable time and advise the employee in writing whether they accept or decline the request.  No reason for declining a request is required.

It is unlawful to require an employee to request to cash out a portion of their annual holidays, and this cannot be a term or condition of employment.

When employment ends an employee must be paid out the value of the annual holidays equivalent to what they would have received had they remained employed.

If an employee leaves employment before they have completed 12 months’ employment they should be paid out 8% of their total earnings at the end of their employment.

Pay-as-you-go Annual Holidays

In limited circumstances, certain employees can be paid their leave entitlements in each pay cycle (“pay-as-you-go”)  This is paid at 8% of their earnings and is limited to:

  • employees who are employed on fixed term contracts for less than 12 months; and
  • employees who work so intermittently or irregularly that it is impracticable for them to be provided with 4 weeks’ annual holidays.

In these circumstances the employee must have agreed to the arrangement in their employment agreement.

Accruing Holidays

Annual holidays begin accruing from an employee’s first day of work and will continue to accrue for each ordinary hour of work an employee performs. Whilst an employee won’t accrue annual holidays when working overtime, they will accrue annual holidays when they are on any other form of paid leave (and they accrue annual holidays whilst on annual holidays too). This means that an employee’s entitlement should be calculated based on the date they intend to return from holidays, not the date they intend to start holidays). Roughly, a full-time employee will accrue 3.07 hours of annual holidays per week.

When accruing annual holidays for an employee, this is best thought of as a ‘pool’ of hours. The value of this pool is only determined by the hourly rate of the employee at the point in time the employee accesses the leave.

Issues to Consider

As holidays accrue in hours, it is often in an employer’s best interest to ensure annual holiday balances are managed properly. It is common to see situations where an employee commences with you as a junior and is promoted throughout the organisation. As an employee earns more and more money, the value of the leave pool with dramatically increase. 20 hours of leave at minimum rates of pay is a lot cheaper for an employer to account for than 20 hours at a CEO salary!  High holiday balances can be managed informally by encouraging employees to take holidays; and more formally by agreeing in writing to a holiday plan.

Another common trap employer’s fall into is the request for annual holidays from an employee who doesn’t have enough holidays accrued to cover their absence. There are no hard and fast rules here, but it is important to be consistent across all employees, or at least be able to support any inconsistencies on reasonable and objective grounds.  An employer can require that an employee takes unpaid holidays for any days in excess of their accrued balance, or they can let an employee ‘dip’ into arrears and pay them for holidays they haven’t yet accrued.

In these instances, while it may be tempting to let an employee dip into arrears to keep them onside, mechanisms to protect the business should be considered. What will you do in the event the employee leaves your employment and you have no agreement with the employee as to when or even if, the value of the holidays taken in advance has to be repaid? All deductions from employee’s pay need to be authorised in writing.

If an employee falls sick during annual holidays, suffers a bereavement, or if there is a public holiday, those days are not counted as annual holidays but are treated as what they actually are, and the employee’s leave balance is credited back with those days.

If an employee accesses annual leave during a pay period, the amount of leave accessed must be shown on an employee’s payslip.