Managing annual leave can be a bit of a headache for small businesses. From juggling staffing requirements and trying to prioritise leave requests fairly to communicating rota changes and calculating holiday pay, there's plenty for managers to think about.
But you also need to keep a close eye on your leave policies, too. As case law develops and new regulations come into force, the legality of your policies might change.
Since the official change from the 1st April 2024, what's the legality around rolled-up holiday pay and who's eligible?
Here are some of the most common questions surrounding holiday entitlement and holiday pay, including rolled-up holiday pay, bank holiday leave entitlement, and pay in lieu of holiday.
First things first...
Q: Is rolled-up holiday pay legal?
A: According to government and Acas guidance, rolled-up holiday pay in the UK only applies to:
- Irregular-hour workers (someone who has variable paid hours in each pay period, as stated in their contract).
- Part-year workers (someone who only works for part of the year, where there's at least a week where they're not required to work and aren't paid).
Rolled-up holiday pay must be calculated correctly (usually at 12.07% of the worker’s total pay in each pay period), paid on top of normal wages, and shown as a separate amount on payslips.
Rolled-up holiday pay isn't generally allowed for regular-hour workers. You (the employer) still need to make sure workers actually take their holiday, even if holiday pay is rolled up into each payslip.
Q: Can I allow employees to buy and sell annual leave?
A: Yes, but employees must always take 5.6 weeks of holiday (or the pro-rated equivalent for part-time staff). You can't let employees sell holiday if it takes them below this amount of leave.
You can also let employees buy additional annual leave. This carries a tax saving for you if your employees take you up on it, as you pay out slightly reduced salaries as a result.
If you decide to do this, we highly recommend setting up a formal buy-back policy to apply limits to the number of days an employee can buy and sell, as well as some deadlines for when these requests must be made.
Q: How do bank holidays affect annual leave?
A: Employees don't automatically have a legal right to paid leave on bank holidays. Employers can include bank holidays within their staff's statutory annual leave entitlement.
If you require employees to work on a bank holiday, there's no requirement to pay time-and-a-half or double pay — it all depends on what's set out in your employment contracts.
As for part-time workers, you must not treat them less favourably than full-time workers. The safest way to do this regarding bank holidays is to pro-rate their bank holiday allowance, regardless of when their shifts tend to occur.
Q: What happens if an employee is sick while on holiday?
A: Employees can choose to take annual leave at another time if they are sick during a planned holiday. This is the case regardless of when their sick leave started. That's because the purpose of sick leave and annual leave is different: the former is to help you recover from illness, while the latter is for relaxation and leisure.
Holiday entitlement also builds up while an employee is on sick leave.
An important note to remember: Employers cannot force employees to take annual leave when they're eligible for sick leave.
Q: Is it lawful to pay employees in lieu of holidays?
A: As an employer, you can't do anything that discourages employees from taking their full leave entitlement while they're employed with you. This includes paying them instead of letting them take their holiday.
The only exception to this is when an employee leaves the company, when you pay them for any remaining holiday entitlement they've accrued and not taken.
Q: Can leave be carried over into the next leave year?
A: In some circumstances. According to Acas, you can carry over leave when someone is on long-term sick leave, on statutory leave like parental leave, or if the employee hasn't been properly allowed or encouraged to take leave.
Q: At what rate does annual leave accrue for part-time workers?
A: In the UK, the typical leave accrual rate is 12.07%. However, 12.07% is not the standard accrual rule for all part-time workers.
Regular part-time workers who work fixed hours all year-round are usually entitled to 5.6 weeks’ paid holiday, pro-rated to their working week.
The 12.07% accrual method now applies to irregular-hours workers and part-year workers for leave years beginning on or after 1 April 2024.
Q: What happens to accrued holiday when an employee leaves?
A: If the extra accrued leave isn't taken during the employee's notice period, the employer must add this holiday pay to the employee's final pay.
If an employee has used up more holiday than they've accrued by their final working date, an employer can only reclaim that pay if it's previously been agreed in writing.
Q: Do I need to include commission in holiday pay?
A: Yes. Your holiday pay calculations should account for the commission a worker typically earns, not just their basic pay rate.
Q: Does overtime need to be included in holiday pay calculations?
A: Yes, apart from overtime that is occasional and infrequent. A good rule of thumb is to provide holiday pay that reflects the overall pay employees normally receive while they're at work.
Q: Overtime, commission, and hours worked vary significantly at our business. What reference period should we use for calculating holiday pay?
A: The little case law we have at present suggests that employers should use a 12-week reference period. However, in highly seasonal businesses, a longer reference period may be more suitable.
Final thoughts
Managing leave and calculating holiday pay aren't the most exciting management responsibilities, but getting them right is critical to keeping your staff happy — not to mention staying on the right side of the law.
We're not lawyers, and this article isn't legal advice. Check out Acas or GOV.UK's advice for more information. If you're at all concerned that you're doing things wrong, get in touch with an employment law expert to set things straight.
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Editor's Note: This post was originally published in March 2018 and updated for accuracy in 2024 and April 2026.