Annual leave policy guide: What every employer needs

When you hire your first employee, you’ll need to decide how holiday entitlement will work and understand the legal rules around annual leave rights.

You might have a lot of questions about the holiday process. How much notice should your employees give when they request holiday? Can you refuse a holiday request? What happens if an employee becomes ill while they’re already on holiday?

UK employment law regarding holidays can feel complex and unfamiliar (especially for first-time employers), so it can be hard to know where to start. However, prioritising strong holiday policy documentation can help you understand and handle holiday requests with more confidence.

An annual leave policy can also set clear expectations and manage your holiday requests smoothly and consistently. This policy gives relevant staff a place to check holiday rules and gives you a clear holiday process to follow.

This guide introduces what an annual leave policy is and how it can help your small business at the start-up stage. We refer to “employees” throughout for simplicity, but please note that statutory annual leave rights apply to workers, too. Workers are individuals who have some employment rights but not as many as employees, which can include casual workers and those who don’t work regular hours or to regular working patterns.

Why should your business use an annual leave policy?

An annual leave policy allows you to clearly set out your staff holiday rules in a policy document. It can help your employees understand your approach to time off, reduce confusion, and give you a defined process for dealing with holiday requests. You can use this as a standalone policy or include it in your staff handbook (if you have one).

Annual leave policies are often non-contractual, so they can usually be changed more easily than employee contract terms. Making this policy contractual can also create risks for you as an employer, as an employee may be able to bring a legal claim against your business if you break the rules set out in the policy.

It’s good practice to review an annual leave policy annually.

Your annual leave policy can explain key points, including:

• Who the policy applies to (e.g. employees and other workers entitled to leave) and who it doesn’t cover (e.g. self-employed freelancers and volunteers), particularly because self-employed individuals aren’t entitled to annual leave.
• The statutory (legally required) holiday entitlement and any additional contractual holiday you give.
• When the holiday year starts and ends.
• How holiday entitlement builds up.
• Whether you include bank holidays within the holiday allowance.
• How you work out holiday entitlement for part-time workers, irregular-hours workers, and part-year workers.
• How employees request holiday and how you approve requests.
• How you deal with requests linked to religious observances.
• What happens during sickness absence and statutory family leave.
• When employees can carry unused holiday forward.
• What happens when employment ends.

• How to add a new employee to your company payroll
• How to hire staff for your growing business
• UK business laws you need to know

Is an annual leave policy mandatory?

No. The law doesn’t require you to have a separate annual leave policy.

But you must still give employees and workers written information about their holiday rights. This information needs to be given in “written employment particulars” (i.e. a written summary of the main terms of employment), which employers usually include in an employment contract.

These must explain:

• The person’s holiday entitlement.
• If bank holidays are included.
• How holiday pay is calculated (remember that workers must receive pay when they take statutory holiday leave).
• How any accrued holiday pay will be calculated when employment ends.

The individual’s employment contract should also cover:

• The holiday year.
• Any notice requirements for taking, requiring, or refusing holiday that differ from the default legal rules.
• How holiday pay is calculated (including when employment ends).

Any right to recover holiday pay if someone leaves after taking more holiday than they have built up should be in the employment contract.

You’ll need to follow these rules and carefully decide which holiday details to cover in the employment contract and annual leave policy (or both).

John Carpenter, Chief of Staff at 1st Formations, says:

Even if you use an annual leave policy at your business, don’t neglect your legal obligations. You’ll need to understand how your annual leave policy works alongside your employment contracts and make sure you provide the correct legally required information. If you’re unsure how to divide holiday information between employment contracts, written employment particulars, and policies, take legal advice to avoid missing mandatory obligations.

What should an annual leave policy cover?

An annual leave policy should explain your rules and procedures for taking holiday. It should help employees understand how holiday arrangements work in practice and help managers deal with holiday requests consistently.

For a small business, some (but not all) points to cover can include:

1. The purpose and status of the policy

Explain the purpose of the policy, who it applies to, who’s responsible for it, and how people can raise questions. If the policy is non-contractual, make it clear.

2. Holiday entitlement

Your policy should explain:

• When the holiday year starts and ends (e.g. from 1 January to 31 December).
• How you calculate holiday entitlement (referring to their employment contract for full details).
• Any extra holidays you choose to give – some businesses increase annual leave as a reward for long service, for instance.

3. Requesting and taking holiday

You should give clear information on how to request holiday and how requests are approved – including who approves holiday, how much notice an employee needs to give, and whether you, as an employer, may require employees to take (or not take) holiday on specific dates, e.g., when your business is closed.

Under default legal rules, a worker requesting holiday must give notice of at least twice the length of their requested leave plus one day.

If you ask someone to take leave on specific dates, you must give notice equal to twice the amount of leave. Your employment contract can vary these rules (e.g. by requiring the employee to give 4 weeks’ notice).

You can also refuse or cancel holidays if you have a strong business reason and follow legal rules.

4. Carrying holiday forward

Explain that employees should usually take holiday in the year in which it accrues and will lose their unused holiday, unless an exception applies.

If you choose to allow carry-over, your policy should explain:

• How many days of holiday employees can carry forward.
• Whether they need approval.
• The long stop date when they must take any carried-over holiday by.

You’ll also need to take into account specific legal rules on carrying over holiday and how these should be built into your policy.

Holiday rights will continue to build up in some cases. This includes when an employee is on statutory family leave, such as:

• maternity leave
• paternity leave
• adoption leave
• shared parental leave
• parental leave
• parental bereavement leave
• bereaved partner’s paternity leave
• neonatal care leave
• carer’s leave.

If an employee can’t take their statutory holiday because of these statutory family leave rights, they can usually carry it forward into the next holiday year.

5. Sickness during holiday

Your policy should clearly cover off holiday sickness carry over the legal rules which apply to this. The rules are complex. Put simply, if sickness stops a worker from taking their holiday before the end of the holiday year, then they may carry unused holiday into the next year.

For workers with regular hours, the law protects up to four weeks of statutory holiday in total. Any holiday already taken during the year counts towards that total.

Different rules apply to irregular-hours and part-year workers. Holiday carried over because of sickness needs to be used up within 18 months of the end of the holiday year in which it built up.

Note that employers must, by law, also pay sick pay to eligible workers and employees.

6. What happens when employment ends

The policy should explain how holiday will be dealt with when employment ends.

For instance:

• Requiring employees to use their remaining holiday entitlement during their notice period.
• Paying the employee for any accrued but untaken statutory holiday at the end of employment.
• Repaying the business if the employee has taken too much holiday.

How is holiday entitlement calculated?

Holiday entitlement is governed by legal rules under the Working Time Regulations 1998.

The rules can be complex and differ between types of workers your business hires, so take legal advice if you’re unsure how much holiday someone is entitled to.

How statutory holiday is calculated

The government’s holiday calculation tool is a useful resource for calculating holiday entitlements.

How does holiday leave work for part-time workers?

Part-time workers are entitled to 5.6 weeks’ statutory paid holiday pro rata. This is generally calculated as 5.6 multiplied by the number of days worked per week.

Their entitlement is based on their normal working pattern, but they’ll receive holiday than someone who is working full time (but with the same proportion of leave).

Their entitlement will be reduced proportionately if their employment starts or ends partway through the holiday year.

What happens if an employee needs time off for long-term sickness or operations?

There’s no general legal right to time off for a routine medical or dental appointment. The employee’s contract or your own workplace policy might explain how to handle this, e.g., whether they should attend outside working hours, make up the time, or use annual leave.

If an employee is admitted to hospital or is too unwell to work, their absence may need to be treated as sickness absence. They may qualify for statutory or contractual sick pay. The position can get more complicated for non-compulsory surgeries.

If the appointment or absence is linked to a disability, you may need to make reasonable adjustments.

If an employee is off sick for a longer period:

• Their statutory holiday entitlement continues to build up.
• They can’t be forced to take annual leave while off sick, although they can choose to use holiday.
• They may carry qualifying unused holiday forward if their sickness stopped them from taking it.

What should you do if an employee is called for jury service?

If this happens, the employee should tell you as soon as possible and give you a copy of their jury summons.

You must allow them to attend jury service. If their absence would seriously harm your business, you can ask them to apply to delay their service and give them a letter explaining why. The employee must apply, but the court makes the decision.

You don’t have to pay them unless their contract or your own workplace policy says otherwise (e.g., you decide to pay as a goodwill gesture).

Do you need an annual leave policy if you’re a sole director?

You may wonder – are directors entitled to annual leave?

Not all directors are automatically employees or workers. In fact, not all limited companies have employees.

Many directors act as office holders, rather than employees, but they can be both.

Whether you’re an employee or worker of your business (with holiday rights) depends on your actual working arrangement (such as whether you have an employment contract with your business and act like an employee).

Even if you are an employee or a worker, practically speaking, you don’t necessarily need an annual leave policy just for yourself.

That said, small businesses will often want to grow fast, so it can be worth putting one in place early to get your house in order.

Having a clear process ready to follow when you take on your first employee can help you stay organised and manage holiday smoothly as the business expands. It’s also a good way to stay organised and demonstrate good practice, which can be important when it comes to raising investment later.

Sample annual leave policy wording

Here’s a short idea of what part of your annual leave policy might look like:

Your Holiday Allowance

Our holiday year runs from 1st January to 31st December, and your holiday allowance is explained in your employment contract. It will usually be for a fixed number of weeks or days within a year. If you work part-time, your holiday allowance will be calculated on a pro-rata basis according to your normal working pattern.

Holiday entitlement can be a complex topic for new employers, but it’s important you take the time to understand the legal rules, document them correctly in your contracts and policies, and handle holiday leave requests properly.

For expert support, company formation, and setting up payroll the easy way with us. Explore 1st Formations’ company formation packages.

Disclaimer

This article provides general and high-level information about employment law in England and should not be relied upon as legal advice. Holiday rights can depend on employment status, contractual provisions, working patterns, and business policies. You should seek advice from a qualified employment law specialist for specific guidance on the employment rules that apply to your business and what your annual leave policy should cover.