Legal update: Handling annual leave build up during the pandemic

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Co-authored by Matthew Durham, registered foreign lawyer and Kritika Sethia, legal analyst at Gall Hong Kong

The Covid-19 pandemic has thrown up many challenges for businesses. Severe and sustained travel restrictions, as well as other uncertainties, have resulted in many employees not taking time off and thus having significant accrued but untaken leave entitlements.

This creates potential risk for companies. Productivity may be affected if employees all take extended or frequent breaks to use up rolled over leave when the situation eases. Similarly, risk management capability may be undermined if a large number of employees decide to take their leave at specific or peak times.

So employers need to consider how to avoid risk and “log-jams” without breaching employee rights. In particular, if necessary, can they require employees to take or to forfeit annual leave?

In Hong Kong, there are two categories of annual leave:

• Statutory annual leave

Statutory annual leave is prescribed by the provisions of the Employment Ordinance (”EO”). After the first year of employment an employee is entitled to seven days of statutory annual leave in the year following its accrual. This entitlement increases with years of service to fourteen days.

• Contractual annual leave

Many employers provide annual leave in excess of the statutory minimum which is generally known as contractual annual leave and is regulated based on the specific terms of the employment contract (including the company annual leave policy, if any). However, if the employment contract does not distinguish between contractual and statutory annual leave, the contractual annual leave is likely to be treated in line with the requirements in the EO.

Can employers require employees to take annual leave?

In relation to statutory annual leave, an employer may, by giving a written notice of at least 14 days (or less, if agreed with the employee) direct an employee to take annual leave. However, the employer cannot make such a direction in the year in which the statutory annual leave accrues. Accordingly, this right may be helpful for managing and clearing leave accrued in 2020, but will not apply to 2021 leave until next year.

In relation to contractual annual leave, the ability of an employer to require an employee to take this leave is determined by the contractual terms. An employer can rely on any specific terms regarding when and how the leave should be taken.

In the absence of clear terms, however, companies should avoid a unilateral direction to take leave. That said, if there is no clear distinction between the statutory and contractual leave and the EO applies, employers could still use the 14 days’ notice route.

Can employers forfeit unused annual leave?

Statutory annual leave cannot be forfeited. Untaken statutory annual leave must be rolled over to the following year or, in certain limited circumstances, may be paid out, but this is an expensive option.

In the case of contractual annual leave (where clearly distinguished), however, the employer is free to follow the relevant provisions of the contract. This may include, for example, a capped or no carry forward policy in respect of contractual leave and the right to forfeit untaken contractual leave in specific circumstances.

Strategies and approaches

Annual leave is an important and prized entitlement of employees. As such, employers need to tackle the issue of “backlogs” with both rigour and sensitivity when considering what strategies are available to them.

Firstly, employers should be clear about the situation for their staff: Review employment contracts and leave policies to be clear about how much leave employees have and whether specific rights and conditions apply to contractual leave; and update and check HR records to calculate accurate entitlements. This is vital for devising the best approach and maintaining the trust of employees.

Clear communication with employees and consistency of approach is also key to avoid mis-trust and disputes. One of the underlying purposes of annual leave and a primary reason for having minimum thresholds of statutory leave is to promote and maintain employees’ physical and mental wellbeing, as well to allow time with family and on external pursuits. There also a clear rationale for taking periodic breaks during the course of the year.

These are core messages which can be included in any communications to staff regarding taking or clearing “backlogs” of annual leave. An employer can still encourage staff to take leave, even if it ultimately cannot direct employees to do so (depending on the type and applicable terms). In addition, for contractual leave which may be forfeited if not taken, periodic reminders from the company will likely incentivise them to do so and to plan ahead.

This article first appeared on the Human Resources Hong Kong website