Buying and selling annual leave

Allowing employees to buy or sell annual leave can boost staff morale and save organisations money. However, there are potential drawbacks, says Nick Martindale.

Real wages are falling – figures from the Office for National Statistics revealed average pay rose by just two per cent in the year to February 2011, while inflation stood at 5.3 per cent in March. Therefore, it should be little surprise that employees are turning towards those benefits that can put a bit of extra cash in their pockets.

Enabling employees to sell holiday is one such offering. NorthgateArinso, for example, reports a 15 per cent rise in the number of instances so far this year, while research conducted by HR services provider Ceridian found the number of employees listing buying and selling holiday as a priority benefit increased from seven per cent in 2008 to 10 per cent in 2009, as the credit crunch took hold.

“The ability to buy and sell holidays is one of the more popular benefits,” says Charles Cotton, Performance and Reward Adviser at the Chartered Institute of Personnel and Development (CIPD). “Living standards have eroded over the last few years. Salaries in real terms are about the same as they were in 2004 or 2005, so people need the extra money.”

Buying holiday, however, also remains popular and is far more common in most organisations. “We’ve seen an increased interest in offering the ability to buy and sell holiday,” says Mark Eaton, Director of Personal Management Solutions Limited, part of the Personal Group. “One of our clients, with 2,000 staff, had more than 20 per cent of staff purchasing holidays, with only two per cent selling them.”


Proven benefits

There are a number of motivations for the employer in offering such a scheme, whether as part of a wider flexible benefits package or as a standalone perk. Top of the list is to help staff make ends meet, by providing an extra source of income through the ability to sell or allowing them to purchase holiday which could negate the need for expensive childcare.

“It’s attractive to different groups for different reasons,” says Nick MacDuff, Senior Flex Consultant at HR consultancy Towers Watson. “Younger people can focus on a longer period away – getting married is often a trigger to do something different – but we have also seen people taking an extended break to do voluntary work. Then you get older people who quite like the idea of taking a few more days off. We also see a lot of people buying additional holiday when they have small children.”

Unlike some benefits, allowing staff to buy or sell holiday is highly valued by employees, says Nick. “Even if you have take-up of fewer than 20 per cent it’s still perceived as being a good benefit,” he says. “Some employees will be cautious and not do it in year one but will consider it in year two once word of mouth gets round that it was straightforward and there were no problems.”

Setting up a scheme usually makes good financial sense for organisations, too; on the basis that employees tend to purchase holiday rather sell it. Here, companies can save 13.8 per cent of the value of the holiday if the benefit is offered on a salary sacrifice basis, on top of the savings generated through the reduction in an individual’s salary.

“Employees selling holiday will effectively increase pay and therefore the employer National Insurance contribution (NIC),” says Andrew Morris, Director of Employee Benefits at NorthgateArinso. “However, as we are still seeing significantly more employees buying holiday than selling, the net effect of the saving can still be significant and would certainly subsidise the delivery of adding that benefit to the flex arrangement.”

Some organisations will opt to only offer the ability to buy holiday (see case study), effectively bypassing the issue of increased NICs – although this clearly removes the benefits for employees who would have been interested in selling days. Others price holidays differently to make it more attractive for staff to buy than sell.

Limiting factors

There are, however, concerns in some organisations about implementing such a system. Nick points to the managerial hassle in ensuring the system is set up over the same duration as a holiday year and making sure no employee goes below the statutory minimum of 28 days a year, inclusive of public holidays; something that can be further complicated when individuals have different entitlements according to length of service.

A further cause for concern could be the potential for staff shortages should individuals opt to take popular times of the year – such as school holidays – off at the same time. This risks piling extra pressure on those who remain in the workplace or eliminates any saving the employer may have made if firms are forced to resort to temporary labour.

“Employers need to do worst-case scenario calculations, so if every employee sold what would be the financial burden, or if a high percentage take more holiday how would it impact on operations?” asks Mark. “Most employers mitigate this risk by restricting the flexibility and limiting the amount of holiday you can flex.”

Nick, meanwhile, believes some companies have switched the start and finish of the holiday year to help reduce this issue. “Retailers, for instance, have moved the dates so they don’t have 1 January as a start date because everyone gets to the end of the year and hasn’t taken enough so they’re off in December,” he says.

Organisations also have the right to refuse permission to buy or sell, or to impose restrictions as to when any additional leave is taken. “We do have some organisations which have gone down a far more egalitarian route and said that if they can’t do it for one group then they won’t do it for any,” says Nick. “The only option then is to sell holiday. However, that is an unusual approach.”

A further issue could be that of staff not taking enough holiday and subsequently leaving themselves at risk of stress. Those in more senior roles tend to be the most common sellers of holiday, says Charles; mainly on account of feeling they do not have the time to use it.

“That can lead to concerns in organisations about how stressed their senior management are,” he warns. “They may sell a holiday for a lot less than the benefit they would have gained by taking an extra day’s leave.”

There is also the prospect that cash-strapped employees could sell holiday to make ends meet, he adds, but then take additional time off sick to manage any caring responsibilities that they may have at home.

Legal matters

Employers also need to be aware of potential legal issues that can arise from offering this benefit. Top of the list is the need to ensure individuals do not go beyond the statutory minimum holiday requirement.

“An employee cannot waive their entitlement to leave in this way, and an employer cannot buy it off from one year to the next,” says Michael Bradshaw, Partner at Charles
Russell LLP.

There are also possible dangers in refusing requests, says Catriona Aldridge, an Associate in the employment team at law firm Dundas & Wilson. “Employers should make it clear in their policy that they have discretion to refuse a request and give examples of the circumstances in which they might do so, such as for operational or technical reasons, for health and safety concerns or because they consider it to be in the employee’s best interests,” she says.

They must also be consistent in how they treat requests to buy or sell holiday, she adds, and not discriminate against part-time staff. Making the change in an employee’s contract is also a good idea, as it can protect against employees changing their minds halfway through a year, while companies should also consider whether they will allow staff to carry over any unused leave to the next holiday year.

The bigger picture

As inflation continues to bite and organisations look for cost-effective ways to retain and attract staff as the economy continues its gradual recovery. Benefits, in general, are likely to become more important over the coming months.

Against this backdrop, buying and selling holiday – with its advantages for both employers and employees – is likely to become increasingly common.

“There are other changes in overall reward, such as pensions, which mean different strategies will make sense for different employers,” says Nick. “Companies which might have thought about offering holiday but haven’t because they didn’t have the means in which people could enrol might add it in because they’re making other changes to the rewards package.”

“The flexible benefits market is growing because employees can choose how to spend their cash on benefits or potentially increase take home pay,” adds Andrew. “Holiday is just one component of that package.”

Nick Martindale is a freelance Journalist, Editor and Copywriter