Employment law and holidays: A guide for small business owners and employers

Holiday entitlement seems straightforward, but small business owners can find themselves in hot water. We look at what you need know

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The Working Time Regulations give all workers the right to paid holidays, irrespective of the hours they work. However, the definition of worker is wider than ‘employees’ and may in fact cover more people than you think.

Casual, part-time and even agency workers are included in this description, including people you may label self-employed, for example if they perform work personally and the relationship isn’t a client/customer one (i.e. if they are not genuinely self-employed).

Some sectors aren’t covered by Working Time Regulations, but unless you’re a seafaring business or work in civil aviation, I’m afraid you’re going to have to keep reading.

HR software is a great way to manage employee annual and sick leave. The right software provider can give you access to expert advice and knowledge, while giving you greater control over your HR functions at a lower cost. To find out more, read our comprehensive guide to the best HR software for small businesses.

Holiday entitlement

So, let’s start with entitlements; how much annual leave are employees entitled to? Each of your employees is entitled to a minimum holiday entitlement of 5.6 weeks’ paid holiday pro-rata (that’s 28 days for someone working five days a week). This time can include public holidays, such as Christmas, Easter and the few Bank Holidays we get in the UK, but it doesn’t actually have to.

As holiday pay is paid pro-rata, part-time workers are obviously entitled to fewer than 28 days, and it is correlated to their working hours each week.

For all employees, from their very first day, they are entitled to holiday. In terms of how to work out holiday entitlement, the amount increases at the rate of one-twelfth of the statutory amount on the first day of each month during their first year.

Holiday pay entitlement

For full-time employees with fixed pay, holiday pay is simple. For each week of leave they take, they are entitled to a week's worth of pay. This is also true for part-time employees with fixed pay, if they take a week's worth of leave they will receive their usual salary for that.

If your staff work shifts, either part-time or full-time, with set contracted hours, a week’s holiday pay is worked out as the average number of weekly fixed hours they completed in the previous 12 weeks, using their average hourly rate.

For zero-hour contract employees or casual staff, a week's holiday pay is calculated as the average pay the worker received in the previous 12 weeks (for which they were paid).

Setting your holiday year

Unless you specify otherwise, your employee’s leave year will start from the first day of their employment. If you don’t do this, and want to make everything a bit simpler, you will need to include the date from which your holiday year runs in your employment contracts. It’s usually January 1 to December 31, but some companies choose to align it with their financial year or tax year.

When deciding when to set yours, think about your busiest period, and avoid it being at the end of your holiday year, as people will be using up left over leave to avoid losing it.

You can’t stop people from taking their holiday entitlement during the year, but that doesn’t mean staff can just take it at any old time: you are able to control how people take their holiday to ensure that they are on leave at sensible times. As examples, not allowing holiday during your busy times or only allowing one person in a department off at once are perfectly reasonable rules.

You are also able to offer more holiday than the statutory minimum and you are free to make your own arrangements and rules for these extra days. For example, if staff are off on long-term sick you might only allow them to accrue the statutory minimum as opposed to including the extra days too.

What you aren’t allowed to do is to reduce the amount of holiday you offer below the statutory level, even if the staff member agrees to it.

Do employees have to take holiday?

This is a tricky area, as if someone doesn’t take their holiday you can’t really force them to. But keeping it simple, your responsibility is to try to ensure that employees take their statutory minimum.

The regulations were brought in as part of an EU measure to ensure that workers’ health was looked after, so any tribunal will look unfavourably on any attempts to get around the obligation to provide holiday.

If employees look like they’re going to have some annual leave allowance left over towards the end of your holiday year, you should really be encouraging them to take it. The ‘use it or lose it’ policy is usually what works best; after all, any sensible employee would jump at the chance to some paid time off surely?

However, if you do go down the ‘use it or lose it’ route, you will want to confirm explicitly in your employment contracts that any holiday allowance remaining will not be carried over – unless in exceptional circumstances such as long-term sickness, maternity or shared parental leave, or being unable to take holiday due to business pressures.

Clarifying this up front also means you avoid the issue of a leaver trying to claim large amounts of untaken holiday pay in lieu.

What about notice – how much warning must be given before holidays are taken?

Employees should give you notice that they will be using their holiday allowance equivalent to twice the amount of time they are looking to take off. For example, if they want two weeks off they need to give four weeks’ notice.

Employers looking to refuse a request should also give reasonable notice equalling the number of days that are due to be taken at least. So, for the above example the employer would need to reject the request two weeks before.

However, if an employer wants to force the employee to take holiday at a set time (e.g. a Christmas shutdown), they must give notice equivalent to twice the length of time of the holiday requested. Employers usually solve this problem by specifying the dates of any usual holiday periods in the contract.

You’re obviously able to waive these notice periods for requests should you wish, or even extend them if you want. For example, many employment contracts will state that any notice is subject to management approval – for example, in a busy or more complex business they may ask for longer notice periods in order to properly organise handovers and cover.

What happens when an employee leaves – are they still entitled to the holiday they’ve accrued?

Sometimes employees leave without having taken all the holiday they are entitled to, in which case you will need to pay them ‘in lieu’ of the untaken days. This will be worked out, in the case of permanent workers, based on how much of the year they have worked. For example, someone who has worked 13 weeks of a year should have taken five days of statutory holiday.

If, on the other hand, someone leaves having taken more holiday than they should, the excess holiday can be deducted from their final pay packet – provided this is set out in a relevant agreement such as their employment contract.

During a notice period, employers may wish to compel employees to use any untaken holiday entitlement during their notice period. This can help to reduce any potential payment in lieu, and if their leaving was caused by any disagreement or grievance then it can also help to keep them away from the office at what could be a sensitive time.

If there is sufficient time to allow notice to be given (see above), the employer can serve notice to require the employee to take their holiday during this notice period. More often, contracts will state an obligation on the employee to use up their holiday during their notice period.

HR outsourcing could help with this, as well as other aspects of HR – read our guide on HR outsourcing for small businesses to learn more.

How do you record tax and NI for staff holiday pay?

In many cases, you do not need to change your usual procedures to manage your PAYE responsibilities for employees taking holiday. However, if you pay holiday pay in advance or if you use certain holiday pay schemes there may be different steps to follow, so make sure you check with HMRC. Most of these schemes have now been ruled unlawful. If you’re still using an old way of calculating holiday pay, for example “rolled up holiday pay”, you should take steps to make sure you’re compliant with the regulations.

The only time that “rolled up holiday pay” is now deemed acceptable is in the case of zero hours workers, where they get paid their accrued holiday at the end of each assignment. This is typically because by the very nature of their contract neither the worker nor employer, know when they will work the next week, so they can’t ‘book’ holiday.

Can you ‘buy back’ holiday from your staff?

As an employer, you are not allowed to pay employees instead of letting them take holiday. Even if the employee agrees it, this is a breach of employment law – except in limited circumstances when employment is terminated.

However, if you offer any contractual holiday above the statutory minimum, you are well within your rights to buy these days back should you wish to. However, this would need to be agreed with the employee first. Some organisations also allow staff to buy more holiday, in exchange for some of their salary.

What is the employment law surrounding Bank Holidays?

You may not believe it, but there’s no statutory right to time off on bank holidays. However, most employers who aren’t in the service industry close on bank holidays and deduct the bank holidays from the statutory holiday allowance.

With the above in mind, it is therefore sensible to include the requirement to work on bank holidays in your employment contracts if it is something that you think you will need.

Using an HR company can help you to stay compliant with employment law – see our guide to the top HR consulting firms for more information.

Are there any other employee holiday conditions that I should know?

There are some areas of holiday allowance that present very specific issues for employers, and we would suggest anyone with any of the following issues seeks advice before proceeding with anything.

These include employees on long-term sick, employees on maternity leave where holiday has not been used up in a particular leave year and employees on holiday who try to convert annual leave into sick leave.

For more information on employment law, check out our section on employee regulations here.

Managing holidays can be done by an HR team – but what is HR? Learn more with our dedicated guide.

Get employment law support

Employment law and employment processes can be difficult to manage for smaller companies. If you do not have a dedicated HR department, team or representative, then you may want to consider getting external support.

We work with a number of trusted HR partners, who can offer guidance for your business. Simply complete our quick and easy form to get quotes today.

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Scarlett writes for the energy and HR sections of the site, as well as managing the Just Started profiles. Scarlett is passionate about championing equality and sustainability in business.

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