Unpaid Leave and Holiday Accrual: What Employers Need to Know

From time to time, small businesses may find themselves in a situation where an employee requests a period of unpaid leave. This can often arise in term time only contracts, where the employee is to take their leave in the school holidays, and yet they request unpaid time off in term time.

The reasons people ask are varied. It could be for extended travel, family commitments, study, or simply to take a break beyond their normal holiday entitlement. Agreeing to unpaid leave can be mutually beneficial – it helps the employee meet their personal needs, and the employer avoids the cost of paid absence while keeping a valued team member in post.

However, there’s an important point to remember: if the individual remains employed during their unpaid leave, they continue to accrue statutory holiday entitlement.

The Legal Position

Under the Working Time Regulations 1998, every employee is entitled to a minimum of 5.6 weeks’ paid annual leave each year (pro-rated for part-time staff). This entitlement does not stop simply because the employee is unpaid or absent from work.

Holiday only stops accruing when employment ends, or if there is a clear contractual break in service – for example, if the employee resigns and is later re-employed. If they remain on your books, they remain your employee, and the holiday clock keeps ticking.

Why This Matters

For employers, this can create unexpected costs. Imagine you approve six months of unpaid leave for a member of staff. When they return, they could have built up half a year’s worth of holiday entitlement, which they are legally entitled to take (or be paid for if their employment ends).

This can be particularly challenging in sectors like Early Years childcare, where staffing levels are tightly regulated and budgets are under pressure. You could find yourself short-staffed if the employee takes their accrued leave soon after returning – and needing to cover their absence yet again.

Managing the Risk

Before approving unpaid leave:

• Ask yourself how this will impact the business – consider the cost in terms of continued accrual of holiday on the business and how you will accommodate the request.
• Plan ahead – consider how you will cover both the period of unpaid leave and the subsequent holiday entitlement.
• Communicate clearly – make sure the employee understands that holiday will continue to accrue and how this will be handled on their return.
• Seek advice – complex situations, such as overlapping maternity leave or long-term sickness, may require tailored guidance.

Final Thoughts

Unpaid leave can be a helpful tool for retaining staff and supporting work-life balance, but it comes with legal obligations and costs. By planning carefully and understanding how holiday accrual works, you can avoid unexpected surprises and keep your business compliant.

If you’re unsure how to handle unpaid leave requests, get in touch with our HR team – we’re here to help you navigate these tricky situations with confidence.