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Will offering unlimited holiday work for my business?

Employment agency Reed has reported a 20% increase in the number of new positions offering unlimited annual leave as part of the benefits packages. Along with flexible working, it seems to be incentive employers are keen to explore and use as they compete to recruit the best talent from a pandemic weary workforce that values well-being and work-life balance.

But is it always a good idea? And how can employers avoid being sued by workers for breaches of the Working Time Regulations 1998 (WTR) which govern the rules on statutory annual leave?

Unlimited annual leave

The basic premise behind unlimited annual leave is that workers are trusted to manage their own time and get their work done. They are then free to take as much leave as they need for themselves and their families, usually in agreement with their line manager.

But how can employers ensure that workers who rarely get to the bottom of their ‘to do’ list feel comfortable taking their annual leave if it comes with the added pressure of leaving no significant task outstanding?

Businesses who have experimented with unlimited annual leave holiday generally report that few workers abuse the benefit. Workers were more inclined to take less leave than they used to take under the traditional ‘use it or lose it’ scheme.

The law on annual leave

Under the WTR a full-time worker is entitled to 28-day statutory annual leave per year (which can include bank holidays.) If they don’t take the 28 days in the leave year, they have no right to carry it over to the next year unless it is for an excepted reason such as maternity or paternity leave or long-term sickness (the ‘use it or lose it’ principle).

If a worker is prevented from taking their statutory annual leave the WTR give them the right to bring an employment tribunal claim against their employer. If the worker proves their case the tribunal must make a declaration that the employer has prevented the worker from taking leave.

The tribunal may also award the worker financial compensation that it considers ‘just and equitable’ under the circumstances. When deciding what sort of compensation to award the tribunal will take into account the employer’s reason for refusing the worker their leave and the worker’s losses (so that could include the cost of the holiday)

Businesses who have experimented with unlimited annual leave holiday generally report that few workers abuse the benefit.

The risks of unlimited leave policy

If your business decides to use an unlimited annual leave policy do not be tempted to cut back on the measures you usually take to record accrued, taken and outstanding leave. If you fail to do so:

  • Workers could bring a grievance (either false or with some justification) that they were pressured into not taking time off due to outstanding workloads.
    The worker could assert their right to bring a tribunal claim under the WTR. This may be a standalone claim or combined with other claims such as unfair dismissal or some sort of discrimination.
  • Your business could suffer the reputational risks of being accused of denying workers their holiday entitlement.
    Workers could risk ‘burn-out’ as they take their work laptops and mobiles away on holiday. Employers risk stress related personal injury claims as a result. These types of claims are a risk to employers under any circumstances, but risks may well be increased if an unlimited annual leave policy is combined with a ‘only when your desk is clear’ culture.
  • Disputes over holiday pay may arise, especially when the employment terminates, and employers are entitled to acrurred but untaken annual leave. If you are using an unlimited annual leave policy clearly state in the employment contract the maximum number of leave days which will be paid (which of course can never be less than the statutory entitlement). Then keep track of the number of days taken. Be wary of the worker who takes ad hoc leave days here and there which slip through the net and go unrecorded. If their employment terminates, they may be overpaid for ‘untaken’ annual leave they are not actually entitled too. For workers on high annual salaries this can be a hefty cost to businesses.

Want to try unlimited annual leave?

Do not let these warnings put you off trying unlimited annual leave if you think it may benefit your business model. Anonymous feedback on Glass Door, the website used by job seekers to research potential employers, was largely positive about employers who offered it.

Writing in the Harvard Business Review in 2017, Aron Ain, the CEO of software company Kronos, reported a 3% increase in their employee satisfaction index and the voluntary turnover rate of staff dropped from 6.4% to 5.6%.

The key to its successful implementation will be complying with the statutory leave provisions in the WTR; making any additional contractual rights clear and by training and supporting line managers who must manage the new system.

For further legal advice on annual leave or any other HR employment matters contact our employment lawyers.

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This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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