Annual leave: entitlement, calculation and payment in lieu

Annual leave is one of every employee’s basic rights and, at the same time, one of the regular tasks of the payroll department. Determining the entitlement correctly, calculating the wage compensation and, where applicable, paying for unused days all require knowledge of the Labour Code and consistent record-keeping. In this article we go through how annual leave works from the employer’s point of view and what deserves particular attention if you want to avoid underpayments as well as disputes with employees.

How the entitlement to annual leave arises

An employee acquires the basic entitlement to annual leave for a year worked, and its extent depends on how long the employment lasted during the year and, in some cases, on the employee’s age or on caring for a child. A distinction is made between leave for a calendar year, its proportionate part and leave for days worked. The exact number of days follows from the law and from the employer’s internal rules; the employer may also grant leave above the statutory minimum as a benefit.

• leave for a calendar year or its proportionate part,
• leave for days worked,
• additional leave for difficult working conditions.

Calculating wage compensation during annual leave

During annual leave the employee does not work but is entitled to wage compensation. This is calculated from the average earnings established for the reference period, as a rule the previous quarter. The average includes the wage components specified by law, so it is important to record all entitlements correctly, including supplements and bonuses. As the figures depend on each employee’s actual earnings, always calculate the resulting amount from current payroll data, not from flat-rate estimates.

Taking and planning annual leave

Deciding when annual leave is taken is within the employer’s competence, and the employer must take into account both its own tasks and the legitimate interests of the employee. In practice, a leave plan drawn up at the start of the year has proved its worth: it helps prevent a situation in which everyone takes time off at once. Under certain conditions the employer may also order leave to be taken, but it must observe the statutory notice periods for announcing the dates in advance.

Payment for unused annual leave

Compensation for unused annual leave can be paid only in exceptional cases, above all when the employment ends and the employee no longer has a real opportunity to take the leave. While the employment lasts, the law gives priority to actually taking leave over paying it out. If an employee does not use up their leave by the end of the year, it is generally carried over to the following year, but the rules have their limits and deadlines, which need to be monitored.

Common mistakes and how to avoid them

Typical errors include an incorrect calculation of the proportionate part, overlooking the reduction of leave in the case of longer absences, or incorrectly determined average earnings. Precise attendance records and professional payroll processing significantly reduce these risks and, at the same time, give employees the certainty that their entitlements have been calculated correctly.

• keeping clear records of leave taken,
• determining average earnings correctly,
• observing the deadlines when ordering annual leave.

Reduction and carry-over of annual leave

In certain circumstances the entitlement to annual leave is reduced, for example where an employee’s long-term absence from work exceeds the specified limit. Conversely, special rules protecting the employee’s entitlement apply on return from maternity or parental leave. If annual leave is not used up by the end of the calendar year, it is carried over to the following year, but the employer should make sure that it does not accumulate indefinitely. It is therefore advisable to monitor balances continuously and plan leave so that employees actually take it. Clear records of balances also make it easier to calculate any payment for unused leave when the employment ends.

If you want to be sure that your employees’ annual leave is calculated and paid out correctly, Bilvao’s payroll team will be glad to help you.

Related articles: Supplements for overtime, night work and work on public holidays, Meal allowance and meal vouchers: what employees and companies can claim, Wage deductions and enforcement: how to proceed.

Frequently asked questions

Does the employer have to pay for unused annual leave?

Payment for unused days is possible mainly when the employment ends. While the employment lasts, the law prefers leave to be taken, not paid out.

What is wage compensation during annual leave calculated from?

From the average earnings for the reference period, usually the previous quarter. The average includes the wage components specified by law. Always calculate the current amount from the employee’s actual payroll data.