August 2 2022

Pros and cons of unlimited annual leave as a benefit

High-profile global employers like Goldman Sachs, LinkedIn and Netflix have introduced unlimited annual leave for their employees in the UK. Yet, this policy is widely controversial. Here we look at the pros and cons of unlimited annual leave to help you decide whether it’s right for your business.

What is unlimited annual leave and how does it work?

Unlimited annual leave is when a company doesn’t give its employees a set number of days to take as holiday each year. In effect, the company lets employees decide how many days’ holiday to take.

The days they take aren’t counted. It’s not like unpaid leave because all holidays are paid as normal.

The legal minimum annual leave allowance for most employees in the UK is 5.6 weeks, under the Working Time Regulations 1998. Employers can offer more days than the statutory minimum, but not fewer. 

There’s evidence that employees take less annual leave when there’s no limit

At the moment, unlimited holiday entitlement is more popular in the US than the UK. That’s probably because there’s no statutory holiday entitlement in the US so some companies don’t offer much in the way of annual leave allowance. 

Statutory annual leave exists to prevent employee burnout and protect mental wellbeing. So, if the unplanned consequence of unlimited annual leave is that people end up taking less holiday, that’s an issue that companies should address.

Are unlimited annual leave policies open to abuse?

You might think that introducing unlimited annual leave will lead to employees taking far more than their statutory holiday entitlement. So does that mean that one of the big cons of unlimited annual leave policies is that it’s open to abuse?

On the other hand, what if employees take too few holiday days? When an unlimited annual leave policy was trialled by CharlieHR, an HR consultancy in London, that’s exactly what happened. We’ll come back to their story when we cover some of the main pros and cons of unlimited annual leave.

Why is this policy relevant now?

Unlimited annual leave is particularly pertinent now because employers are becoming increasingly aware of their employees’ mental wellbeing and promoting a healthy work-life balance.

The cost-of-living crisis, COVID-19, and the instability of the world are issues that play on everybody’s minds. On top of this, many people are working longer hours today than they were pre-pandemic. 

So it’s not surprising that stress-related absences from work are rising. With employee burnout rates on the up, many businesses are introducing company-wide mental wellbeing breaks to help address the issue.  

Employees want a better work-life balance more than ever

Lockdowns brought into sharp focus the value of relationships and spending time with loved ones. In 2022, 24% of workers plan to leave their jobs in search of a better work-life balance.

Unlimited annual leave has been introduced by many businesses against this background. It allows people to rest and recharge for as long as they need, and it’s an extension of the flexibility today’s employees want. 

Unlimited annual leave is very important for attracting and retaining top talent and it could lead to more productive employees.

How does annual leave affect employees’ mental and physical wellbeing?

Working long hours has a detrimental effect on both physical and mental wellbeing. A study into the effect of long working hours and overtime on occupational health showed that long hours are linked to depression, poor sleep quality, and excessive alcohol consumption.

Work fatigue also raises the risk of cardiovascular diseases. Working long hours is one of the biggest causes of employee burnout.

Annual leave is essential for people’s health and morale, and consequently for the health of a business. Back in 1926, Ford discovered that well-rested workers were more productive over a shorter length of time than those who worked consistently long hours.

What are the pros and cons of unlimited annual leave?

Here are some advantages of unlimited annual leave:

1. Well-rested employees are more productive

After introducing unlimited annual leave, software company Kronos had a “great year for financial results”. They believe unlimited annual leave has led to happier, more engaged employees, which has increased productivity. 

Kronos employees can take the time off that they need without worrying about using up their holiday entitlement. A study by the University of Oxford backs Kronos’ findings by revealing that happier workers are 12% more productive.

2. People don’t take excessive annual leave

Kronos and Mammoth HR (who’ve also introduced an unlimited annual leave policy) found that people generally take the same amount of holiday as before, or just a day or two extra.

3. Where there’s trust, there’s loyalty 

By granting unlimited annual leave, a business shows that it trusts its employees to get their work done and plan their holidays considerately. CEO of Kronos, Aron Ain, points out that a business should only hire employees it trusts in any case. 

The Harvard Business Review found that trust has a huge, positive impact on employee loyalty. A big benefit for Kronos was their staff turnover rate, which went from 6.4% to 5.6% after unlimited annual leave was introduced.

4. Unlimited annual leave is an attractive perk for candidates

Before introducing unlimited annual leave, Kronos had 300 vacant positions they couldn’t fill. CEO Aron Ain says the policy has been “successful so far” in helping them to attract the right talent to their business.

What are the disadvantages of unlimited annual leave?

1. Fear around taking too much holiday could create a culture of burnout

As there’s no limit to the amount of holiday employees can take, they may worry about taking too much. People might feel guilty about their colleagues taking less time off. 

A big anxiety for some employees is that by taking time off, their employer will see them as not committed to their job. As a result, there’s a lot of fretting and second-guessing involved, one of the big cons of unlimited annual leave policies. 

Perhaps that’s why a number of companies, including CharlieHR and Buffer, noticed that their employees were actually taking fewer days when they could choose how many holiday days to take.

Buffer gets round the issue by specifying a minimum number of days’ holiday every employee must take. They also lead by example by encouraging their senior leadership team to visibly take time off. For instance, Buffer’s CEO shared that he’d taken 14 days off to go travelling.

2. No set days means no unused days when employees leave 

When an employee leaves a company or retires, they’re typically (but not always) paid for any holiday they haven’t used. With unlimited annual leave, there’s no set number of days. This means no unused days for employers to repay the employee leaving.

You could argue, however, that annual leave is supposed to be taken. The whole point of annual leave is to ensure employees rest for the benefit of their mental and physical wellbeing. 

3. It can harm team camaraderie 

CharlieHR found that because some people were taking more annual leave than others, those who took less holiday were taking up the slack. This meant some people became overworked and resentful. 

CharlieHR also found that those on higher salaries took more time off than those on lower salaries. They put this down to the fact that those with a larger pay packet could afford to go away on holiday more often.

To address this issue of inequality, the tech giant Evernote, who’s also introduced unlimited annual leave, gives each member of its staff a $1,000 budget to travel. This is so all their employees “feel valued and empowered.”

Benefits and perks help keep employees motivated

When thinking about the pros and cons of unlimited annual leave, it naturally leads to the broader discussion around which benefits employees value most.

This right mix of benefits and perks promotes a workforce that’s happier, less stressed and more motivated. The Rewards Report found that 82% of staff who felt motivated at work received perks and benefits. 

When a company genuinely cares for its staff, productivity increases. That’s because people take less time off sick and stay with the business for longer. Plus, the company is more able to attract the right talent. 

Having enough downtime from work is essential for people’s physical and mental wellbeing. When people are refreshed and free of stress, they perform at their best. 

Research from CIPHR found that most people they surveyed would prefer extra holiday allowance to unlimited holiday allowance. So that’s food for thought when weighing up the pros and cons of unlimited annual leave. 

Physical and mental wellbeing is linked to financial wellbeing

Openwage is a financial wellbeing benefit that gives your employees instant access to a portion of their earnings whenever they need it. With anxiety about money is rising, on-demand pay can help ease financial stress. 

It does this by giving employees the confidence that they can cover unexpected costs that fall between paydays without emptying their savings or resorting to expensive credit.

Please contact us today to hear how on-demand pay can promote your employee’s financial wellbeing.