Should you change the Holiday year for your business?

12 August 2016

Should you change the Holiday year for your business?

Some businesses are considering changing their holiday year to align it with their financial year in order to avoid problems with accounting for the holidays accruals under the new International Financial Reporting Standards (IFRS). Below we explain why this might be necessary.

What is the issue?

We illustrate with a simple example – an organisation’s financial year end is at the beginning of April, however, their holiday year runs from January to December each year. At the end of the financial year, the employer will need to calculate the employees’ entitlement to holiday for the period i.e. the accrual and compare this to the amount of holidays actually taken. By beginning of April employees will have accrued one third of their total annual holiday entitlement, but it is unlikely that all of them will have used the accrued days as most of them will be saving the time to perhaps take a longer holiday during the summer. Your auditor will take a view whether the discrepancy between the accrual and holidays taken is “material” and therefore needs to be reported.

How to address this?

There are several ways of trying to minimise the risk of this causing an issue:

  • If your holiday and financial year are aligned, it is far more likely that employees will have taken all their holiday entitlement by the end of the holiday year and therefore it is less likely that there will be a material difference.  Some organisations also impose limits on carrying over any outstanding leave the following holiday year to encourage employees to use their entitlement. 
  • If the holiday and financial year are not aligned, you might use a different approach to ensure that employees have taken their accrued entitlement by the end of financial year. You might achieve this by imposing a company closure where everyone must take holidays, or you could offer incentives for those who take a certain number of holidays by a certain date.

As noted above, you might want to take steps to align the holiday year with the financial year. In a lot of cases the holiday year will be specified in employment contracts and changing this will effectively amount to a change in contract and appropriate consultation should therefore take place.

How can contracts be varied? 

A contract may specifically refer to the employer’s right to vary certain terms. Most often we see this applied to clauses that deal with the date of payment or the holiday year. Where such specific rights exist, the employer may be able to change the holiday year without consultation but it would be prudent to seek legal advice as some wider flexibility clauses may be unenforceable. Generally though, an existing contract of employment can only be varied only with the agreement of both parties:

  • An employer who is proposing to change an employee's contract of employment should fully consult with the employees or their representatives and explain and discuss the reasons for the change. 
  • Employees are far more likely to accept changes if they can understand the reasons behind them and have an opportunity to express their views. Involving employees makes good business sense, as it drives up levels of employee engagement and motivation. 
  • Variations to the contract can be agreed verbally or in writing. It is preferable for any agreed changes to be recorded in writing. 
  • Changes may be agreed on an individual basis or through a collective agreement (i.e.: agreement between employer and employees or their representatives). 

Where a variation to the contract has been agreed, the employer should give written notification of the change to the employee within a month of the change taking effect.