Unlimited annual leave – key considerations for employers

Since the Covid pandemic, it has been widely reported that employees have been leaving the workplace or changing jobs. A Microsoft survey of more than 30,000 workers globally found that 41% were considering resignation or changing profession altogether. Economists have coined this the “Great Resignation” reflecting a shift in employee priorities and raised awareness of the connection between work and mental health.

The impact on UK businesses has been significant. One notable change is the move to hybrid working and many employees now specifically request this as a fundamental term of employment. There has also been a large increase in employers implementing well-being policies, such as free counselling, gym membership and enhanced medical insurance (to include alternative therapies).

This represents a considerable widening of the Employee Assistance offering, traditionally aimed at damage limitation. Instead, employers are finding that without well-being policies in place “as standard”, they are unable to engage and retain their current workforce, or attract new talent.

The rise of “unlimited annual leave”

One new benefit that we have seen implemented recently is so called “unlimited annual leave”, a policy, which on the face of things seems impossibly good. Who wouldn’t want to work only the hours they choose, and take the rest as a holiday? This benefit appears to be favoured in the tech industry but other sectors are following suit.

Unlimited leave reflects a significant uplift on the statutory minimum position. Under the Working Time Regulations 1998, full-time employees are legally entitled to 5.6 weeks’ paid holiday each year. Of course many employers offer more than this basic entitlement, but the idea of unlimited leave is a new departure altogether.

Implications for employers

Is such a policy sensible, or will it store up problems for the future? Whilst it may incentivise some staff, an equal number may attempt to abuse an employer’s trust.

Employers therefore need to be extremely careful when implementing an unlimited annual leave policy. Failing to set expectations and create a well-structured and transparent policy, could create significant problems, for example:

  • What does “unlimited” really mean? Of course no employer is likely to be entirely happy if an employee takes 52 weeks’ annual leave in a leave year. An employer must therefore ensure adherence to minimum performance criteria. After all, an employer’s business still needs to function.
  • Employees will still need their manager’s permission to take time off, which could result in the policy being enforced differently from one manager to another, potentially increasing sexual, racial or religious inequalities. Employers should set expectations and train managers on implementation to ensure a consistent approach wherever possible.
  • Lack of cover during an employee’s holiday may also discourage them from taking time off, undermining the incentive for annual leave altogether.
  • Calculating accrued leave on termination could also cause employers, a significant headache. Importantly, if accrued but untaken annual leave is unpaid (or underpaid) upon termination of employment, this may give rise to a claim for unlawful deduction from wages covering a period of up to two years of unpaid leave. This could amount to a significant financial liability. Employers should therefore be careful to limit the amount paid on termination to either the employee’s minimum accrued statutory entitlement or some other contractually agreed amount.

It is ultimately important to strike a balance between the needs of the business and the well-being of staff. By doing so, a business can reward staff, minimise uncertainty and mitigate the risk of potential litigation.

To find out more about creating employee-focused policies, or any other aspect of employment law, contact Meredith Hurst on 020 7377 2829 or email [email protected]