HR policies

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A complete guide to your annual leave policy (with a free template)

A complete guide to your annual leave policy (with a free template)

When it comes to writing an annual leave policy, there is no one-size-fits-all solution

Small companies need to figure out what works best for them and be prepared to revisit or adjust their HR policies whenever their business needs change.

Deciding the purpose of your annual leave policy is essential, but at Charlie, we understand how nuanced that can be. That's why we put this guide together to help you write your own annual leave policy.

No time to read this? Download our policy below.

Download our annual leave policy-01.webp

What is an annual leave policy?

An annual leave policy sets out the amount of holiday members of your team are entitled to each year, and the process for requesting time off

Annual leave policies help to ensure impartiality and consistency across the company and avoid internal conflict.

An annual leave policy also gives your employees something to refer to whenever they need it, answering many of the practical questions they may have about requesting and taking holiday — for example, whether the bank holidays are included in their annual leave allowance. 

Why does a small business need an annual leave policy?

A small business needs an annual leave policy to ensure that all employees are treated fairly and consistently. Your policy provides you with a framework for managing time off across your team effectively

A clear and defined annual leave policy will prevent people from carrying over too much leave and ensure they take enough time away from work. Which is vital for their mental and physical health, and productivity at work. 

Which answers should your annual leave policy provide?

A good annual leave policy will answer the questions that managers and employees may have about practically using holiday allowance. Questions like:

  • Are the bank holidays included?
  • What happens to any leave you don’t take?
  • What happens if you’re sick while on annual leave? (a sickness policy will also help with this)
  • How do you calculate holiday pay?
  • Can a leave request be declined? 
  • Does annual leave need to be used or taken by a certain time?
  • Can you ‘cash in’ your leave?
  • What happens to your holiday allowance if you leave the company?
  • How much annual leave can be carried over to the following year? 
  • How do you accrue annual leave?

Also, check out our attendance policy and birthday leave policy for more information.

8 sections you should always include in an annual leave policy

There are many aspects of your annual leave policy you'll want to cover, and we're sharing the 8 sections you need to make it compliant and clear to your team.

1 – Policy's purpose and scope

First, you should state what the policy is for and who it applies to. This might seem quite obvious, but you must start off with this as an introduction.

This may also be a time for you to start introducing the importance of the policy, as well as what kind of time off you will include in it: bank holidays, holidays, pro rata, etc.

2 – Holiday entitlement

Naturally, what comes next should be your team member's holiday entitlement – this is to make sure your employees are aware of how many days they can take per year and ensures you don't have to include it in your employment contracts to avoid extra paperwork.

Having an annual leave policy allows you instead to amend policies whenever you please and iterate as you go – your employment contracts can simply refer to the section of your employee handbook for simplicity.

3 – Annual leave requests process

Once you've covered the basics, you should proceed with describing what the annual leave request process looks like – this is when an employee wants to book a holiday.

Here, you should include the following information:

  • Who can approve their holiday (their line managers and other people responsible for operations and HR, for example)
  • How much notice they should give before sending a time off request (this can also be dependant on how long they will be off for)
  • How many team members of the same team can be off at the same time (overlapping time off)
  • How many days they can take in a row (generally, no more than two weeks at a time)
  • Where they should send their requests (email, form, etc.)

And if you want your time off process simplified, you can use HR software like Charlie to deal with time off requests – completely automated with time off approved or denied in one click. Start a free trial today.

4 – Company holiday year, carry over leave, and leave in advance of accrual

Let's now go into details. Your annual leave policy will need to cover the following aspects:

  • Company holiday year – this is when your holiday runs to and from. A lot of companies choose to make it simple and run it from January to December, but others, like us at Charlie, align it with the tax year (April to March).
  • Carry over leave – you will need to specify whether your employees can carry holidays onto the next year or not, and if they can, how many days they're entitled to carry over.
  • Leave in advance of accrual – if you have new starters or people wanting to take leave before they've accrued enough (let's say, for example, someone wants to take five days when they've only accrued two), you'll need to mention whether that can be done or not.

5 – Bank holidays inclusion

A big aspect of holiday entitlement when building a holiday policy is usually including bank holidays as part of the allowance.

So, for example in the UK, the minimum allowance is 28 days, but this can include 8 bank holidays.

The next question you're going to ask yourself and mention in your holiday policy is whether these days are flexible or not – generally speaking, it's best to make this policy inclusive for all. Find out more about creating a bank holiday policy for your business in our guide.

6 – Sickness during annual leave

No one wants to be ill during their holiday, but it can happen. An employee might, for example, take holidays whilst they're on sick leave or become sick whilst they're on holiday.

Whatever the circumstances, your annual leave policy must help you stay consistent and apply the same rules to all of your team members so they can understand whether:

  • the time off will be counted as holiday or sick leave
  • the rate they're paid at will be sick pay or holiday pay

7 – Disciplinary consequences

Creating an annual leave policy takes a lot of work, and that's where it shouldn't just be brushed off by your employees as vague guidelines, but as a set of rules that they need to follow.

To guarantee the respect of your annual leave policy and the standardisation of HR processes across your business, you should think about outlining the potential disciplinary consequences for team members who refuse to comply with the policy wording.

This can include, but is not limited to:

  • Taking more time off than initially intended and not informing their line managers
  • Booking plane or train tickets before the holiday has been approved
  • Ignoring the notice period and booking holidays last minute
  • Booking holidays at a time when the company does not allow for (Black Friday for retail, for example, when they need all hands on deck)

8 – Termination of employment contract

It is also worth including a statement on what will happen to individual annual leave allowances when their employment is terminated. And you’ll need to align this with your employment contracts.

When a team member decides to leave your company, you'll be able to give them two choices (or choose for them as well):

  • Allow them to take the remaining time off they've accrued during their notice period
  • Calculate the time off they're owed pro rata and add it to their last payslip

Annual leave policy – free template

As you’ve probably now realised, there’s more to an annual leave policy than meets the eye. 

And if you’re feeling daunted, you’re not alone! 

We support hundreds of small businesses with their policy-making at Charlie, and there are very few owners who feel confident about what exactly they should offer or how they should put it into practice. 

For that reason, I’m including a template for an annual leave policy for UK small businesses with this blog.

Our annual leave policy template is downloadable and customisable, so that you can immediately put it into use. And it’s completely free.

Download our annual leave policy-01.webp

FAQ for Annual Leave policy

What is the standard holiday policy in the UK? (Statutory paid holiday)

By law in the UK, most employees are entitled to 5.6 weeks' (or 28 days’) statutory paid holiday per year. 

Including the bank holidays in the statutory holiday allowance is at your discretion as an employer — 28 days including or plus the bank holidays. Whatever you decide, it should be clearly outlined in both your annual leave policy and your employment contracts so that your employees understand if they’re included in their statutory allowance. 

What are the barriers for small businesses wanting to write an annual leave policy?

There are common barriers for small businesses when it comes to managing annual leave and writing an annual leave policy: 

Flexibility versus consistency:

  • Balancing flexibility with the importance of consistent operations is a common challenge for small businesses. You need to strike a balance between accommodating individual employee needs and ensuring that your business can function. (Check out our hybrid working policy template for more information on this)

Employee satisfaction:

  • Employee satisfaction is crucial. A leave policy that is perceived as too restrictive can cause dissatisfaction and ultimately affect employee retention. While a policy that’s too lenient may cause confusion and impact productivity.

Integration with other policies:

  • Coordinating your annual leave policy with other HR policies, such as sick leave, remote working, or flexible scheduling, can be complex. Ensuring that your policies complement each other is essential for creating a positive workplace culture. Remember that it should also be in line with the values outlined in your diversity and inclusion policy.

Technology limitations:

  • Many small businesses don’t have advanced HR technology, which means a lot has to be done manually. This results in the increased likelihood of errors and makes it challenging to track and manage leave effectively.

Accrual and tracking:

  • Managing accrual and tracking leave is complex, especially in small HR teams that rely on manual processes. So errors in calculations are common. 

How should you manage annual leave?

Every small business is different, with different staffing requirements throughout the year. So finding the right annual leave policy may not be that straightforward, and you need to be prepared for some trial and error. 

As a fellow small business, it took us a while to find an annual leave policy that suited Charlie. I’m going to share our learnings with you here, so that they might speed things up a little for you. Charlie exists to support other small businesses, and hopefully, you will benefit from what we learned. 

For our first three years, we offered ‘unlimited holiday’ to all employees because we felt that extending this amount of trust invited them to take ownership of the company's future. Unlimited holiday works for some of the big companies and sounds great in theory, but in practice, it just didn’t work at Charlie. And we felt that after three years we’d given it a pretty good shot! 

Off the back of what we learned during our unlimited leave trial, we created our current holiday policy and we now offer every member of our team 25 days’ leave, plus the bank holidays. As part of this, we recommend that our employees take five days off work every quarter, but obviously we can’t enforce this. 

Our current annual leave policy feels like a good fit for our business and our team, but as we’re always innovating we decided to roll out our 9-day fortnight in 2021. So in addition to our 25 days plus bank holidays, everyone at Charlie now has every other Friday off.

There are many reasons we moved to a 9-day fortnight, and we tracked and measured success over a trial period before making it a permanent policy. 

Whatever you choose to do at your business, you need to make informed decisions when drafting and launching new policies. Knowing what you want to achieve, and what warning signs to look out for, is key. 

If done without enough planning and thought, managing annual leave is likely to be confusing, error-prone, and time-consuming. Keeping the purpose of the annual leave policy in mind at all times should help you to figure out what works best for you.

You want an annual leave policy that:

  • Enables you to easily respond to leave requests
  • Ensures you don’t give too many people the same day off
  • Helps you maintain an up-to-date holiday calendar
  • Helps you to keep track of when members of your team are on leave, and how much allowance they have left 
  • Ensures that your employees are taking enough time away from work. 

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