Last reviewed 7 May 2018

In this article, Kathy Daniels, employment law author and lecturer, looks at the issues you need to consider to ensure you are managing annual leave correctly.

The Working Time Regulations 1998 set out that all employees and workers are entitled to 5.6 weeks (28 days) of paid annual leave. If an individual works on a part-time basis they are entitled to the appropriate amount of annual leave on a pro rata basis. The 5.6 weeks can include the bank holidays that are allowed in the UK.

Payment for untaken annual leave

Although this might sound very straightforward, there are a number of issues that have arisen with reference to annual leave over recent years. The most recent was addressed in the case of King v Sash Window Workshop Ltd [2017], which was a ruling from the Court of Justice of the European Union (CJEU).

In this case, King had worked as a self-employed sales representative for many years. He had been offered an employment contract at one stage, but he refused this because he preferred to work on a self-employed basis. When he left the organisation he made a number of claims, including one that he had not received the annual leave to which he was entitled.

To decide if he was entitled to annual leave his employment status needed to be determined. The employment tribunal found that he was a worker, and therefore he was entitled to receive annual leave. The Court of Justice found that King was entitled to carry forward his leave without restriction, because his employer had not provided him with the opportunity to take the leave. Although King had never asked to take leave and had been confused, he had suffered a detriment because he had not taken the leave (and the employer had benefited because he had worked on without interruption). It has been ruled, therefore, that he is entitled to receive payment in lieu of all the annual leave that he has not taken during his employment.

The Deduction from Wages (Limitation) Regulations 2014 do put a limit on back pay for unpaid holidays of two years. However, the Court of Justice has ruled that there should be no limit on how much unpaid leave King should be compensated for, which does question whether this UK legislation is enforceable.

This case demonstrates that you must take care to define employment status accurately. If you are treating someone as self-employed, and they are actually a worker or an employee, this could lead to a hefty bill for unpaid annual leave.

What to pay during annual leave

It is also important to ensure that you pay an employee or worker the correct amount when they take annual leave. This has also been the subject of case law in recent times. There have been cases asking whether commission, overtime, bonuses and various other elements of financial reward should be included when calculating annual leave.

The most recent of these cases is Flowers and others v East England Ambulance Trust [2017]. In this case, ambulance workers were arguing that two financial elements of their pay should be included when calculating their average earnings for the purpose of annual leave. First, there was voluntary overtime which the individuals received when they covered a shift which was not fully staffed. Second, there was non-guaranteed overtime which the individuals received when they were attending an accident or emergency, their shift ended but they needed to continue working to complete the work that they were doing. It was ruled that both these elements of pay should be included when calculating the payment for annual leave.

This case follows the conclusions of similar cases. When calculating what to pay an individual who is taking annual leave you should include all the financial elements of their pay, and then take the average over the last 12 weeks prior to the start of the annual leave. That is the amount that you should then pay during the annual leave.

Annual leave during sickness absence and maternity leave

Employees accrue annual leave, and as those who are absent due to sickness or maternity leave are still employees during their absence, they continue to accrue the leave. This means that you must allow an employee to take their annual leave when they return from their absence, because they cannot take annual leave and sickness/maternity leave at the same time.

From a practical perspective, this can be used as a way of phasing an individual back into work. For a period of time you could allow an employee to take a set number of days of annual leave each week while they used up the accrued amount, as part of a phased return.

Illness and annual leave

Having already noted that employees continue to accrue annual leave during their sickness, it is useful to consider what happens if an employee becomes ill prior to some booked annual leave or during their annual leave. Do they take annual leave and sick leave at the same time, or should the annual leave be cancelled?

This was a question that was addressed in the case of Pereda v Madrid Molividad SA [2009]. In this case, an employee became ill just prior to a period of annual leave that he had booked. He would still be ill when the leave started and, therefore, he asked his employer if he could rearrange his leave. This request was refused. The CJEU ruled that he should have been allowed to rearrange his annual leave. It is not possible to take annual leave and sick leave at the same time because they are for different purposes. Annual leave is for rest and relaxation, whereas sick leave is for recovery from illness.

Do note that you can still enforce your usual sickness reporting processes. So, if an employee becomes ill during their annual leave they would still have to inform you within the timescales set out in your sickness absence policy to be entitled to take sick leave.


So, what should you do?

  1. Make sure that you check that you are giving paid annual leave to all workers and employees in your organisation. Check that anyone you are treating as self-employed really does have that status.

  2. When workers or employees take annual leave, make sure that they are paid their average salary over the previous 12 weeks when taking leave.

  3. Ensure that those who are on sick leave or maternity leave continue to accrue annual leave, and allow them to take the leave when they return.

  4. Do not allow someone to take annual leave and sick leave at the same time.