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Adam Partington

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Ask the Expert: Can we buy back chunks of carried-over annual leave?

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The question

I have recently commenced working for a company, which has a policy allowing staff to carry over their unused annual leave into the first three months of the new year (the leave period runs from August to July).
 
If the leave is unused by the end of the three months, it is forfeited.
 
But on looking through current annual leave balances, it has become clear that many employees’ annual leave entitlement hasn’t been officially removed from the record after those first three months, which means that they have accrued large annual leave balances.
 
My question is, is the company allowed to ‘buy back’ a portion of that annual leave (say five days), but then staff have to forfeit the rest?
 
Given that employees believe they are entitled to it, it doesn’t seem right to simply remove all of it, especially as the policy hasn’t been enforced in the past. A buy-back situation would make expectations clear with regard to annual leave going forward, however.
 
What is the legal situation here? Would such a scheme be legal, and if so, is there a maximum amount of days that an employee can sell?
 
 
The legal verdict
 
Esther Smith, a partner at Thomas Eggar
 
Employees have a statutory right to 5.6 weeks’ holiday each year. During the leave year, it is not possible to buy this time back from them or pay them in lieu of untaken holiday unless their employment is terminated.
 
However, where holiday is carried over to the following leave year, you will, generally speaking, be able to buy back the unused days.
 
But the difficulty in this instance is that, while you have a clear policy in place, it has not been enforced. Therefore, if your employees now have a ‘reasonable expectation’ that holiday will be carried over, then your actions may have impliedly varied their employment contracts to allow for this arrangement. 
 
What will be deemed a ‘reasonable expectation’ depends very much on the circumstances, but will include how long the situation has been allowed to continue.
 
For example, if it only happened this year due to an oversight on your part, it would probably not amount to a reasonable expectation. If you have been operating in the same way for a few years, however, then it may.
 
Going forward, if you want to change the policy, you should ensure that everyone is aware of the rules and enforce them strictly so that there is no doubt in anyone’s minds that holiday, if not taken within three months of the following leave year, will be lost. 
 
Esther Smith is a partner in Thomas Eggar‘s Employment Law Unit.
 
 
Adam Partington, a solicitor at Speechly Bircham
 
The first issue to consider is whether staff members have a right to the accrued leave mentioned. If they do not, it makes the situation easier to deal with.
 
From what you say, the company policy is clear – it states that holiday is lost after the first three months of the new holiday year if it has not been used. Therefore, you need to evaluate whether deviation from this policy has given employees a right to that accrued leave or not. 
 
Although it may well have done, it will depend on the facts and is something that should be explored further with the help of legal advice. While staff members’ belief that they are entitled to this leave is relevant, it is not determinative.
 
The extent to which your employees have a right to carried-forward leave will shape how you deal with this. The “buy back” arrangement is a viable solution to deal with any such entitlement, especially if staff are prepared to agree to this.
 
However, it is important to note that workers are entitled to a statutory minimum amount of annual leave under the Working Time Regulations of 5.6 weeks.
 
The WTRs state that workers cannot be paid in lieu of this annual minimum leave except on termination of their employment. As a result, any “buy back” scheme would need to make sure that, if employees were paid in lieu of any holiday entitlement, they retained at least the statutory minimum amount of annual leave under the WTRs.
 
This means that they could not sell back to you a given amount of leave if they had to drop below their statutory minimum holiday entitlement.
 
However, it would be sensible to take advice on how to implement such a buy back arrangement, which could, in turn, be a good opportunity to explore whether there are cheaper or simpler alternatives.
 
You will also need to manage this situation going forward to ensure that it does not happen again. This will involve working out how much scope there is to change the practice that gave rise to this problem in the first place.
 
The challenge is that, if this situation has become an accepted part of employees’ contracts, you will need to vary those contracts. Again it would be sensible to take advice on how to do this effectively and ensure that you follow due process. 
 
Adam Partington is a solicitor at Speechly Bircham LLP.
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