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Pauline Fong, an Assistant Solicitor at Payne Clermont Velasco Solicitors, outlines what you need to know

As a result of the pandemic and travel restrictions, many employees prefer to accumulate their annual leave and carry it forward. However, accumulating large amounts of accrued annual leave can create concerns for employers. It is a potential financial liability for the company, as accrued annual leave usually needs to be paid out when an employee ceases employment. Equally, employees should be careful that, in their wish to accrue annual leave, they don’t inadvertently forfeit it.

Both employers and employees need to know whether it is permissible for employees to carry forward untaken annual leave and whether it is lawful for employers to forfeit untaken annual leave. First, one must understand that there are two types of annual leave: statutory and contractual.

Statutory annual leave is the minimum days of paid annual leave prescribed by the Employment Ordinance. An employee’s entitlement to statutory annual leave increases progressively from seven days to a maximum of 14 days according to one’s length of service. For example, an employee who has worked for one year is entitled to seven days of annual leave in the following year.

Contractual annual leave is any additional annual leave granted to the employee pursuant to the employment contract. Contractual annual leave is governed by the terms and conditions of the employment contract.

If the employment contract makes no distinction between contractual and statutory annual leave, the Court may construe the contractual annual leave as the same as statutory annual leave, which imposes obligations on the employer under the Employment Ordinance. Consequently, employment contracts need to be carefully drafted to distinguish between contractual and statutory annual leave.

Statutory annual leave cannot be forfeited. In fact, an employer must ensure that employees take all their accrued statutory annual leave within the following year. It is an offence under the Employment Ordinance to fail to grant statutory annual leave within the prescribed period.

The untaken statutory annual leave should, at the election of the employee, be taken at a time agreed by the employer or paid in lieu.

There is a lot more flexibility in dealing with contractual annual leave as there are contractual rights to be mutually agreed by the parties. The key is to draft the relevant terms and conditions clearly. For example, an employment contract can provide that any accrued annual leave in addition to statutory annual leave can be forfeited or carried forward to the next year with the permission of the employer if not taken within a year after it has been accrued. To provide more certainty, the employment contract can also state the maximum annual leave days that can be carried forward.

Under the Employment Ordinance, an employer is entitled to ask the employee to take statutory annual leave by giving at least 14 days prior written notice. With regard to contractual annual leave, the arrangement is governed by the terms of the employment contract. In the absence of such terms, the contractual annual leave is likely to be treated as statutory annual leave.
During the pandemic, when employees have little incentive to take annual leave, employers should nonetheless make sure employees take their statutory annual leave within the prescribed time. For the more generous contractual annual leave, when and how it should be taken would be governed by the relevant terms of the employment contract.

Pauline Fong is an Assistant Solicitor at Payne Clermont Velasco Solicitors in Sheung Wan. The firm has considerable experience acting for both employers and employees in employment disputes. For more information: 2527 9538, [email protected], www.payneclermont.com.

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