Last updated: 19th May

Furloughed employees have continuous employment, and will continue to accrue leave as per their employment contract.

The employer and employee can agree to vary holiday entitlement as part of the furlough agreement, however almost all workers are entitled to 5.6 weeks of statutory paid annual leave each year which they cannot go below.

Employees can take holiday whilst on furlough. Working Time Regulations require holiday pay to be paid at the employee’s normal rate of pay. Therefore, if a furloughed employee takes holiday, the employer should pay their usual holiday pay in accordance with the Working Time Regulations. For employees who have variable pay, holiday pay should be calculated on the basis of the average pay received by the employee in the previous 52 working weeks.

For periods of holiday taken by furloughed employees, employers will be obliged to pay additional amounts over the furlough grant, and cannot claim the additional holiday pay from the grant.

If an employee usually works bank holidays then the employer can agree that this is included in the grant payment, the additional pay for the bank holiday must be paid and cannot be claimed under the grant. If the employee usually takes the bank holiday as leave then the employer would either have to top up their usual holiday pay, or give the employee a day of holiday in lieu.

HMRC state that employers will have the flexibility to restrict when leave can be taken if there is a business need. This applies for both the furlough period and the recovery period.

Accruing annual leave

The guidance confirms that workers placed on furlough continue to accrue statutory holiday entitlements, and any additional holiday provided for under their employment contract, whilst on furlough.

HMRC has released a  government holiday entitlement calculator to calculate a worker’s statutory holiday entitlement.

Subsidising holiday pay with furlough funding

Employers can continue to claim through the job retention scheme for furloughed workers, even when they are taking holiday.

The employer is required to top up the employee’s gross pay when holiday is taken, if the employee is entitled to higher holiday pay than their furlough pay. The amount of pay that a worker receives for the holiday they take depends on the number of hours they work and how they are paid for those hours. The principle is that pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work and working. Holiday pay, whether the worker is on furlough or not, should be calculated in line with current legislation based on a worker’s usual earnings. Where a worker has regular hours and pay, their holiday pay would be calculated based on these hours. If they have variable hours or pay, their holiday pay is calculated as an average of the previous 52-weeks of remuneration, excluding weeks in which there was no remuneration.

Holidays taken whilst an employee is on furlough will be, therefore, at least in part, subsidised by the job retention scheme, as the Employer can continue to claim the 80% furlough grant.

Allowing furloughed employees to concurrently take holiday also increases flexibility for employers, and allows them to potentially ensure that furloughed workers do not return to work with excessive amounts of annual leave remaining.

Requiring workers to take annual leave

Although previous HMRC advice confirmed that furloughed employees could take annual leave without breaking furlough, it was unclear whether an employer could oblige workers on furlough to take holiday during this period.

The updated guidelines now advise that employers can require staff to take annual leave while they are furloughed, subject to usual statutory notice periods. However, the guidance advises businesses to “engage with their workforce and explain reasons for wanting them to take leave before requiring them to do so”, and “employers should consider whether the aim of annual leave, rest and relaxation, is met if someone takes annual leave during furlough if they are required to socially distance or self-isolate”. It, therefore, implies that consideration should be given if the employee has been formally advised that they are “at risk” and should to self-isolate for medical reasons.

An employer requiring an employee to take holiday is required to give them notice. The required statutory notice period is:

  • double the length of the holiday, if the employer wishes to require a worker to take holiday on particular dates
  • the length of the planned holiday if the employer wishes to cancel a worker’s holiday or require the worker not to take holiday on particular dates

Employers can ask workers to take/cancel holiday with less notice but this needs the workers’ agreement to do so. Both the notice and employee acceptance should be in writing.

The notice periods must be in advance of the first day of the holiday, and the notice must be given before the notice period starts. For the purposes of calculating the required notice period, any uninterrupted period of holiday counts as a single period. The rules on notice periods can be altered by a binding written agreement between the employer and the worker.

Bank holidays

For furloughed workers who would usually take bank holidays as annual leave, the guidance sets out two options. Employees can either take the bank holiday as annual leave during furlough, and be remunerated as agreed in their employment contract, (i.e. the bank holiday day pay is topped up to full pay)or the bank holiday can be deferred.

Carry-over holiday days

The government has passed new emergency legislation allowing workers to carry forward, for two years, any holiday they were unable to take this year due to Covid-19.

It is understood that this provision has been designed to help those workers who are unable to take leave as it has not been reasonably practicable to take the leave year to which it relates, e.g.  if the business is facing increased demand due to Covid-19, if there is a requirement for the business to operate with a workforce disrupted by Covid-19, or due to working on the front line. It is anticipated that furloughed workers are unlikely to need to carry forward statutory annual leave, as they will be able to take it during the furlough period with the appropriate notice periods given. However, if, due to the impact of coronavirus on operations, the employer is unable to fund the difference, it is likely that this would make it not reasonably practicable for the worker to take their leave, enabling the worker to carry their annual leave forwards.

When a worker carries leave forwards due to Covid-19, they will continue to accrue holiday in the next leave year. As such, they will have 2 entitlements: the holiday that has been carried forward that must be taken in the next 2 leave years and the entitlement that relates to the new leave year.

Agency workers

The updated guidance confirms that the CJRS does not change the method by which agency workers accrue holiday.

The new guidance states; ‘Where holiday rights exist under the Agency Regulations, they remain unchanged when workers are on furlough. Where agency workers are engaged under a contract of employment which sets out their entitlement to holiday, that is 5.6 weeks or more in accordance with the Regulations, their contract will continue to operate as before and they will continue to accrue holiday on furlough as they would normally when between or otherwise not working on assignments’.

There is no new entitlement for agency workers who are not normally entitled to holiday entitlements between contracts. Therefore, some agency workers on a contract for services contract, may not be entitled to the accrual of holiday, or to take holiday under the Working Time Regulations while on furlough, because they are not workers or treated as workers under those Regulations when between assignments, or otherwise not working on assignments. However, if the contracts in place include holiday provisions, they will continue to operate in the same way as they did prior to the furlough period.

Agency workers who have worker status can take holiday they are entitled to under the Regulations or their contract of employment while on furlough. Where a furloughed agency worker takes holiday, the agency must pay the worker in full and may continue to claim the grant from HMRC for 80% of the worker’s wage cost.

The ability to carry holiday into future leave years may also apply as it does to general employment.

Employment Law Advice

It is recommended that Employment Law advice is sought, to ensure all contractual and legal obligations and entitlements are met. The contracts of employment in place will influence and direct the specific action required by the employer.


HMRC guidance on holiday pay and furlough can be found here. 

Despite the various updates and clarifications issued by HMRC, it is becoming increasingly clear that the rules around what can and cannot be claimed under the furlough scheme are complex. From the conversations we are having with clients, and the enquiries we are receiving, it is apparent that employers are unintentionally not always claiming the correct furlough grant via the HMRC portal, and that in most cases claims are being inadvertently overstated. This is particularly the case when the pay period includes a mix of work days and furlough, and where the employer is topping up the furlough pay, including holiday top ups.

We are assisting clients to manage HMRC’s expectation by sample checking their portal calculations to ensure that there are no ongoing compliance issues. If you have any concerns about the claims that you have made to HMRC, please contact a member of Smith Cooper’s Employment Tax team.