Reducing Annual Leave Entitlements Introducing A Buy Back Scheme

Reducing annual leave: essential steps for employers 

Reducing annual leave entitlements from employees is not a decision that should be taken lightly. Annual leave will be a statutory and contractual benefit and therefore cannot be easily removed.

Firstly, employers would need to check the employees contract to see if there is a clause which permits them to make changes to the contract. If there is no clause which permits changes to be made, then the employer should consult an employment law and HR expert, who will advise on what options are available in order to make the most effective decision for the organisation.

If there is a clause permitting employers to make changes to the employment contract, then it is recommended to enter into meaningful consultations over a period of time. This gives the opportunity for the employee to consider the proposal to reduce the annual leave and to feedback any ideas they may have.

Secondly, the employee must agree to the changes. Going ahead and removing a benefit without the employees agreement and meaningful consultation, could result in a claim for breach of contract.

How can the employer get the employee to agree to reducing their annual leave entitlements

For the changes to be considered ‘fair’ the employer needs to offer some level of compensation of similar value, or alternative arrangements, such as:

1. a one-off bonus or additional payment
2. an increase to the employee’s salary
3. an increase to another benefit
4. additional days off elsewhere (ie introducing an holiday ‘buy-back’ scheme)

Holiday ‘buy-back’ schemes can often be referred to as holiday purchase schemes, holiday purchase programme or a salary sacrifice holiday scheme. READ MORE about these types of scheme further down the page.

How many annual leave days can the employer remove?

The Working Time Regulations 1998 was set up to protect the health and safety of workers across Europe and the UK., ensuring that employees have adequate rest and breaks from work, with a minimum entitlement for paid annual leave.

The minimum paid leave a full-time employee can take from work is 5.6 weeks, this is equivalent to 28 days an can include bank holidays. Although, very often employers provide more entitlement than this, which is known as contractual holiday entitlement.

Employers can decide to remove annual leave which does not go below the statutory 5.6 weeks (28 days). Although compensation or alternatives should be offered to a similar remuneration value.

How many days can an employer reduce annual leave entitlements by for part-time workers?

Part-time workers who work a set amount of hours throughout the whole year will be entitled to a pro-rata amount of annual leave from the 5.6 weeks (28 days), depending on what days of the week they work.

If they work 4 days per week, they must be entitled to at least 22.4 days (4 x 5.6 weeks). Checking an employee’s existing contract will help to define the maximum number of days an employer might look at reducing their annual leave entitlements by.

What is the holiday entitlement for individuals who work irregular hours and part-year?

It is recommended that employers speak to an employment law and HR expert on this. Although further information can be found on the .gov website.

What happens if the employer cannot get the employee to agree to the changes?

If an employee does not agree to the changes and the offer of compensation it is very risky making the changes, as the employee could claim it is a breach of contract. The employee may raise a grievance and/or make a claim to an employment tribunal which could become costly to the employer.

It can be less risky if the employer decides to let the employee keep the existing annual leave entitlement and then when the employee leaves, that contract is terminated.

What happens once the changes are agreed?

Once you have gained the employees agreement to the reduction in annual leave, it is recommended to change the employment contract either by an addendum to the contract or a completely new contract, preserving the continuous service.

What if the employer has some employees with different annual leave entitlements to others?

During consultation you may find that some employees are resistant to giving up their current annual leave entitlement. This could be for many reasons, but it is likely because they don’t see the benefits of the compensation or alternative offering. It may help if the employee saw the proposals in a different format, perhaps in ££’s on a spreadsheet.

Offering additional days off elsewhere as an alternative to reducing the annual leave

At some point during the consultation process (or after), the employer may make the decision that annual leave is important to employees and that perhaps introducing a different annual leave scheme could improve staff morale. Some employers find that introducing an annual leave/holiday ‘buy-back’ scheme (holiday purchase scheme, holiday purchase programme and a salary sacrifice holiday scheme) works very well.

The scheme is intended to assist employees in balancing their home and work life. Staff may need extra time off to go away travelling, for personal reasons, for childcare purposes or just additional time off to help with their home/work life balance. These schemes are fairly straight forward. Employees will put a request in for additional annual leave which they would buy from the employer. The employer would decide how much each day would cost the employee. Usually it’s set at a slightly discounted rate to what they are paid for their usual working day. This is deducted from their salary at an agreed time (and can be spread over a period of months). Employers would also set a maximum level to how many days can be purchased in any one holiday year.

It is very important for the employer to have the terms of the scheme written into a HR policy so there is complete understanding of how it works. Many employers trial this sort of scheme first before it is introduced on a more permanent basis and more importantly, before it forms part of the employee’s terms and conditions of employment.

What is the difference between a holiday ‘buy-back’ scheme, holiday purchase scheme, holiday purchase programme and a salary sacrifice holiday scheme?

A holiday ‘buy-back’ scheme is also known as a holiday purchase scheme or holiday purchase program. It is an employee benefit which is not the same as a salary sacrifice holiday scheme, although they do involve using an employee’s salary to purchase additional holiday.

Lets explain the difference…………..

Salary sacrifice holiday scheme

• A salary sacrifice holiday scheme is different to the schemes mentioned above, because the employee agrees to give up a portion of their salary each year and exchanges it for additional annual leave days. In other words, the employee is sacrificing a portion of their gross salary.

  Benefits of this scheme: Having this type of scheme in place is very attractive to employees and employers for the same reasons, but also there could be certain tax advantages for the employer and employee.

What are the pitfalls of a salary sacrifice holiday scheme?

1. The employee has a reduced net salary as they are sacrificing some of their pay in exchange for additional holiday.
2. There is likely to be an impact on the employee’s pension contributions as the amount that is sacrificed may not be included when the employee’s pension contributions are calculated. This ultimately less earnings and therefore less money going into retirement savings.
3. There could be tax implications as there would be a change to the employee’s taxable income, which could impact on the calculations for tax credits and government benefits.
4. There would be limited flexibility in this type of scheme for the employee because it limits how they can use their salary, as they will always need to have deductions for their annual leave.

What happens to the salary sacrifice holiday scheme when the employee leaves their employer? 

When the employee leaves their employment, the salary sacrifice holiday scheme will come to an end.

Do most employers offer a salary sacrifice holiday scheme?

A salary sacrifice holiday scheme is less common than other schemes that allow employees to buy annual leave, most likely because of the administrative burden.

Whether or not to offer this type of scheme, would be dependent on the organisation and industry. Research shows that organisations that introduce these schemes find that this can be an effective cost saving exercise, as it can help to reduce absence levels, improve staff morale and motivation levels and enable employees perform better in their roles..

Need some help with your business?

For reassurance when you’re dealing with a similar situation you can contact us for expert advice on the best way to proceed. 

Ethical HR consultancy services

Our approach is centred around the individual needs of our clients – each organisation is assigned a dedicated HR Consultant.