Annual Leave

There are three possible sources for annual leave entitlements: 

  • Working Time Directive leave (WTD leave) – this is 4 weeks per annum
  • Working Time Regs leave (WTR leave) – the UK decided to increase the entitlement by a further 1.6 weeks per annum, so WTR leave includes WTD leave and is 5.6 weeks per annum
  • Contractual leave that exceeds WTR leave

How leave accrues

WTR says a worker is entitled to a week’s pay (as defined in Employment Rights Act 1996) for each week of leave taken, or alternatively if hours vary the average week’s pay over a rolling 12 week reference period.  

Point being: from WTR perspective the right is divided into weeks (not days or hours).  In this way, part time workers’ entitlements are automatically pro rata (e.g. 3 days per week x 5.6 weeks = 16.8 days entitlement per annum).

Watch out for: sometimes employers forget to amend standard form contracts of employment to ensure part time worker’s rights to leave are pro rated and accidentally retain FTE entitlements for these employees.

Also watch out for: WTR leave should include regular payments such as commission payments.  If these vary, an average figure should be used and included in pay for periods when leave is taken.

What about bank holidays?

For WTR leave it does not matter which days are used to satisfy the 5.6 week entitlement, so bank holidays are included. 

Often contractual leave enhances the WTR entitlements by providing for a number of days over 20 FTE plus bank holidays (e.g. 25 days plus bank hols = 33 days FTE, 5 more than WTR leave).

So if an employee’s normal working day falls on a bank holiday, and the employer closes its premises on bank holidays, these days count towards the WTR entitlement. 

When can leave be paid in lieu? 

WTD & WTR leave should only be paid in lieu on termination of employment because entitlements to this leave remain even if it is ‘bought back’ by the employer.

The employer and the employee are free to agree whatever they like with contractual leave, so this can be paid in lieu of both parties agree to this.

How should a payment in lieu of annual leave be calculated? 

When employment terminates accrued WTR leave must be paid in lieu according to the Reg 14 formula, essentially: 

[Total leave entitlement of 5.6 weeks x normal weekly working days]

Multiplied by [proportion of leave year expired at termination date]

Less [days taken in current leave year]

Note the key date is the effective date of termination of employment, so if there is a pay in lieu of notice (rather than notice served) then this is sooner rather than later. 

For any additional Contractual leave, the right to be paid depends on what the contract says, but to make life as simple as possible it is usually sensible to just follow the formula above for this also.

Can an employer require an employee to take leave? 

Yes, the employer can do this by giving notice* under Reg 15 (2) .

So where notice of termination is being served on an employee the employer can require the employee to take annual leave by giving them notice in accordance with Reg 15 (2) and thereby reduce the amount of PILAL due.

* notice from the employer must at least twice as many days long as the period of leave that is to be taken.