Holiday & Leave

Forfeiture of annual leave

by Susana Ng, senior associate, Allen & Overy

Article exclusively contributed by Allen & Overy

Annual leave is meant to provide employees with time off for rest and relaxation so that they can have a break from working life. However, business pressure sometimes prevent employees from taking annual leave within the work year, even while knowing that their employment contracts stipulate that they will have to forfeit all unused leave at the end of the leave cycle.

This was the issue under consideration in the case of Archer, Harold Dean vs The Hong Kong Channel Limited. The plaintiff was the managing director of a company that produced television programmes for hotels. According to his employment contract he was entitled to two weeks paid leave in each calendar year, in addition to Hong Kong public holidays.

It was expressly stated in the plaintiff's employment contract that he was required to take annual leave at the end of the calendar year in which it was earned and that all unused leave would be forfeited.

Contractual agreement

During the plaintiff's employment with the company, both parties conducted themselves in accordance with the contract, but once the plaintiff's employment was terminated, he lodged a claim against the company seeking, among others, a payment representing seven days' annual leave accumulated during the previous year.

The company disputed this claim, pointing out that under the terms of the plaintiff's employment contract he had not been allowed to accumulate leave from previous years.

In examining whether the company was acting within the law when it required the plaintiff to forfeit his unused annual leave, the Court referred to Section 41AA(5)(a) of the Employment Ordinance. The ordinance stipulates that employers should grant their employees annual leave "within the period of 12 months beginning immediately after the expiration of the leave year to which it relates."

The Court ruled that in this case the plaintiff's employment contract ran counter to the Employment Ordinance as the contract stated that the plaintiff would forfeit his annual leave if he did not take it within the year in which he earned it. This provision in the employment contract was considered void and the Court ruled against the employer.

Q & A on forfeiting annual leave and payments in lieu
Q1 Can an employer force an employee to forfeit unused annual leave?
A1 Under the Employment Ordinance, annual leave is calculated based on the length of an employee's service with the employer and varies from seven to 14 days. This period of annual leave is known as statutory annual leave. The Employment Ordinance prohibits the forfeiture of statutory annual leave. However, if an employer grants an employee an annual leave entitlement that is more generous than the statutory requirement, the employer and employee are free to draw up their own agreement regarding the treatment of unused non-statutory (or contractual) annual leave.

Q2 May an employer ask an employee to take annual leave during his or her notice period?
A2 The Employment Ordinance prohibits the absorption of an employee's accrued annual leave into the notice period, as this would result in the loss of an employee's entitlement to payment in lieu of unused annual leave on termination. However, an employer may allow an employee to include annual leave as part of the notice period.

Q3 May an employee surrender annual leave in return for a payment in lieu of annual leave?
A3 Under the Employment Ordinance, an employee may (not must) surrender statutory annual leave in excess of 10 days in return for a payment in lieu. This must be done with the employer's consent. However, an employer may not compel an employee to do so. An employee and employer may under no circumstances agree to surrender statutory annual leave in return for a payment in lieu if the employee's statutory leave entitlement is less than 10 days. The employer and employee are free to agree on the treatment of non-statutory annual leave.

Q4 How does an employee calculate his annual leave entitlement if he leaves the employer before the end of the leave year?
A4 The Employment Ordinance provides that, in calculating annual leave on a pro rata basis, a fraction of a day will be rounded up to the next figure. For instance, if an employee is entitled to 15 days of annual leave for each calendar year and has only worked for five months in that year, he is entitled to seven days of annual leave (six and a quarter days rounded up to seven days).

Taken from Career Times 03 October 2008, p. C7

(Last review date: 23 August 2013)

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Disclaimer: The opinions expressed in this article are those of the contributor

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