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Everything you need to know about annual leave carryover

Frank Mittag

The holidays are approaching, winter is settling in, and the year is winding down. During this time, many of us start taking a look at all the leave time we have leftover from the year. The average UK worker takes only 62 percent of their annual leave entitlement, so most of us have quite a bit of time left over at the end of the year.

Some companies have begun carrying holiday time over into the next year. There are advantages and disadvantages to this plan and people who feel strongly on both sides of the issue. Read on to learn more about annual leave carryover and how to manage it.

The advantage of allowing annual leave carryover

For many businesses, the holidays are one of the busiest times of the year. People are trying to get holiday shopping done, and you want your employees focused on helping customers, not their leftover leave time. But if they have a lot of days leftover, they may be more stressed and less productive.

Allowing annual leave carryover can reduce your staff’s stress during the holiday season. Studies have shown that employees who are less stressed are more productive. You can also reduce your stress on your part by avoiding the rush of employees trying to cram in the rest of their leave time before December 31.

The other advantage of avoiding that rush is that you won’t find yourself short-staffed at the busiest time of the year. You need all hands on deck during this time, but your employees don’t want to lose their vacation days. If you allow annual leave carryover, you’re less likely to find yourself running the business by yourself at the busiest time of year.

Allowing annual leave carryover can also help boost your employees’ morale. Every now and then, all of us like a long vacation, but it’s hard to do that if you know you’ll be using all your leave time for the year. Your employees might have to save that leave time in case they get sick or have a family emergency.

When your employees can carry their leave over from year to year, they can build up a good bank of time off. This lets them take longer vacations every few years, which can do a ton to boost their job satisfaction and loyalty. It may sound counterintuitive, but allowing these long vacations can actually save you money in employee turnover costs in the long run.

The risks of allowing annual leave carryover

Unfortunately, annual leave carryover can come with some risks, too. One of the biggest ones is that your employees may wind up abusing their holiday carryover. They know that their holiday will roll over to the next year, so they may not take the time off throughout the year.

Paid leave time is an industry-standard for a reason. Everyone needs days off from time to time, whether that be to take care of a sick child or have a mental health day. But our culture prioritises work over all, which is leading to more and more employee burnout.

It sounds counterintuitive, but some studies have shown that allowing annual leave carryover can actually decrease employee wellbeing. Rather than spacing their holiday out over the year, they might push through and try to avoid taking any leave until that holiday they have planned in two years. This results in employees who are more stressed, less productive, and less happy in their jobs.

From your end, allowing annual leave carryover can also result in more staff shortages. Part of what you calculate with annual leave is how much you’ll have to spend each year on temp help or extra shifts when employees take time off. And yes, your staff may be at work more consistently, but they may also have huge banks of time off built up.

If two or three staff members decide to take two-week vacations in the same summer, you could find yourself seriously short-staffed. Allowing annual leave carryover can make it harder for you to plan to cover those absences. If leave is only given year to year, you can be better prepared to cover the extra costs so you don’t lose money.

The importance of understanding annual leave carryover

One major factor you’ll need to take into consideration when you’re deciding whether to allow annual leave carryover is the laws in your area. Local regulations can vary, and not having a solid understanding of these laws can cost your company tons in legal proceedings. Take the case of Shimizu vs. Max-Planck as an example.

In December 2013, Mr. Shimizu, a fixed-term contract worker, was nearing the end of his contract. Max-Planck offered Mr. Shimizu an opportunity to use up the significant amount of leave he had amassed during his time with the company. But instead of taking the full 50 days of annual leave he had accrued, Mr. Shimizu asked that Max-Planck pay him for the time off instead. 

The accrued time off would have come to a total payout of almost €12,000. Max-Planck refused to pay for the time off, and Mr. Shimizu sued. The resulting lawsuit went all the way to the German Federal Labor Court and then to the European Court of Justice, or ECJ.

The ECJ ruled that employees should not automatically lose their right to carry over annual leave to the next calendar year. The exception is if the employer can prove that the employee had a genuine opportunity to take that leave and was clearly informed about all their rights for paid leave. This includes being informed about the company’s policy on annual leave carryover.

If Mr. Shimizu could prove that he was not warned that Max-Planck had a “use it or lose it” policy with annual leave, he would be entitled to the €12,000 payout. But if Max-Planck could prove that they had informed Mr. Shimizu that they had a “use it or lose it” policy, the responsibility for not having taken the days would rest on Mr. Shimizu.

Key takeaways from ECJ’s ruling on annual leave carryover

There are a few points you should take away from the Shimizu vs. Max-Planck case. The biggest is that you, the employer, are responsible for informing your employees about your leave policies. You should have documentation that you told them about your policy and offered them the chance to clarify anything they were uncertain about.

You should also be sure to encourage your employees in all reasonable ways to take their full annual leave entitlement before the end of the year. For one thing, as we’ve discussed, this will lead to you having healthier, happier, more productive employees. But for another, it can help you avoid a situation like Max-Planck’s where an employee has more than a month of leave stacked up and are asking you to pay that leave out to them.

If you do not plan to allow annual leave carryover, you need to make that clear to your employees. Use that as a tool to encourage them to take their leave during the rest of the year. Post that policy on the wall of your office, and require all new employees to sign a form saying they have read and understood the annual leave carryover policy. 

A great way to compromise between not allowing any annual leave carryover and having to pay out €12,000 in time off is to set a cap on the amount of time off you can accrue. You can also set expiration dates on days off. Be sure to communicate both of these policies to your employees.

The most important thing is communication. Whether you allow annual leave rollover, allow no annual leave rollover, or enact any other policy, you need to communicate this to your employees. And you need to have proof that you did so to head off any potential lawsuits.

How to manage annual leave policy clearly

So how do you go about communicating those annual leave policies to your employees? In many cases, leave terms are stated in the employee contract. And while it is true that employees are responsible for reading any contract they sign, it’s better to be safe than sorry. 

When you hire a new employee, sit down with them and go over every piece of the contract individually. Read them the company policy, and ask them if they have any questions about it. Clarify any points they may have questions about, and only when they acknowledge that they fully understand the leave policy should you ask them to sign the contract.

If you plan to limit the amount of annual leave carryover your employees can accrue, make those limits clear. Include in that contract the maximum number of days your employees can accrue. If you’re combining this with an expiration date policy, be sure to make the terms of that clear, too.

It’s also a good idea to go over with your employees exactly how they can go about taking that time off. Make sure you set up a system where you require a written request of some sort for time off, and keep all those requests in your file. This will prevent an employee from coming back and saying they were told they could take time off, but never told how they could do that or never granted their leave requests.

Manage leave more efficiently with HR software

Trying to manage who has how much leave accrued can be tricky, especially if you have a lot of employees. Adding in expiration dates, leave caps, and other such complications can make that all but impossible. Having some good HR software on your side can make keeping up with your annual leave carryover a snap.

From your employees’ perspective, having software like kiwiHR can make it easier to manage their time off. They can check how many days of leave they’ve accrued whenever they like. And the system has tools for requesting time off that are simple for the employees and well-documented for you.

On your end of things, kiwiHR handles tracking who has annual leave carryover and how much. You can set caps and expiration dates and the system will take care of everything automatically. No more tally sheets with scribbled dates and crossed out days off.

kiwiHR can also make it simple for you to see who’s taking leave at which times. You can check on leave balances before you approve time off requests and keep records of that time off. You can also see a preview of who will be out of the office when so you can arrange for those shifts to be covered.

Track your annual leave carryover

As the owner of a business, one of your biggest responsibilities is handling annual leave carryover. You need to know if your employees are taking the appropriate amount of time off and make sure your employees understand your annual leave carryover policy. Having a solid HR program can help you manage that side of your business with ease so you can focus on other tasks.

If you’d like to start managing your annual leave carryover hassle-free, check out the rest of our site at kiwiHR. We can help you handle everything from onboarding and employee records to time tracking and time off management. Try kiwiHR for free and start running a more effective business today.


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