Managing holiday entitlement: Best practices for SMEs

Understanding UK holiday entitlement law

UK law entitles full-time employees to a minimum of 28 days’ paid annual leave, including bank holidays. This equates to 5.6 weeks per year. Part-time workers are entitled to the same amount on a pro rata basis. Employers can choose whether or not to include bank holidays within this allowance.

Holiday entitlement begins from day one of employment and accrues monthly. During the first year, employees earn one-twelfth of their entitlement each month. Leave can be carried over in limited circumstances, such as long-term sickness or where employees couldn’t reasonably take it.

Failing to adhere to holiday law can lead to tribunal claims, fines, and reputational damage. It’s critical SMEs ensure contracts, staff handbooks, and policies reflect current legislation.

Common challenges SMEs face

SMEs often lack dedicated HR support, making holiday management more vulnerable to errors and inconsistencies. One common issue is underestimating the impact of multiple employees taking leave at the same time, particularly during school holidays or peak trading periods.

Another challenge is failing to track accrued leave accurately, especially for part-time, temporary, or zero-hour staff. This can lead to over- or underpayments, disputes, and compliance risks.

Many SMEs also struggle with communicating clear rules around booking leave, blackout periods, and notice requirements. Without clear guidelines, misunderstandings and frustration are almost inevitable.

Best practices for managing holiday entitlement

Start with a clear, written policy that outlines how holiday is calculated, how to request it, and any restrictions on timing. This helps set expectations and avoid disputes.

Use a shared calendar or rota system so staff can see who’s off and when. It encourages transparency and discourages overlapping requests. Require reasonable notice for leave requests; a general rule is twice the length of the holiday being requested.

Track leave accrual and usage carefully, especially for part-time or irregular workers. Use consistent methods to calculate holidays for different contract types.

Finally, deal with requests fairly and consistently. Prioritise based on the order received, business needs, or on a first-come, first-served basis, but be transparent about how decisions are made.

Using holiday management software

Manual tracking can quickly become unmanageable as your team grows. Holiday management software simplifies the process by automating accrual calculations, approvals, and tracking. Many platforms integrate with payroll and scheduling tools, reducing admin errors.

For SMEs, cloud-based systems are particularly useful because they're affordable, easy to scale, and often come with mobile access for employees

Using HR software also ensures consistency and provides a clear audit trail if disputes arise. It’s a smart investment that saves time and supports compliance.

Creating a clear holiday policy

A strong holiday policy forms the foundation for consistent leave management. It should cover entitlement, accrual, how to request time off, minimum notice periods, and any restricted dates.

Clarify how unused leave is handled, whether it can be carried over, for how long, and under what conditions. Be explicit about procedures during probationary periods or for irregular contracts.

Include details on how leave is approved, and whether certain roles require cover before leave is granted. The more precise your policy, the fewer misunderstandings you’ll face.

Keep it accessible. Include it in contracts, employee handbooks, and onboarding materials.

Handling leave during busy periods

Peak seasons can put pressure on SME staffing levels. To maintain operations, you may need to restrict leave during certain periods, but this must be handled fairly and communicated clearly.

Include blackout dates in your holiday policy and give as much notice as possible. If certain times of year are consistently busy, make it part of your annual planning. Be transparent about the business rationale.

Consider using a rota system to ensure everyone has a fair chance to book time off, especially around school holidays or Christmas.

Plan ahead. Encourage early holiday requests to help balance cover and avoid last-minute conflicts.

Encouraging a healthy work-life balance

Encouraging staff to take their full holiday entitlement isn’t just good for morale, it reduces burnout, supports wellbeing, and improves productivity. Yet many employees in SMEs don’t use all their leave, often due to a culture of presenteeism or fear of falling behind.

Lead by example. Make it clear that taking time off is expected and supported. Monitor leave usage and nudge staff who haven’t booked any.

Create a culture where rest is valued. Avoid rewarding overwork or long hours, and ensure workloads are manageable so employees don’t feel punished for taking leave.

A well-rested team performs better and stays longer.

Why it matters

Managing holiday entitlement properly is more than a legal obligation; it’s a cornerstone of good people management. For SMEs, getting it right means fewer disputes, smoother operations, and a happier workforce.

With a clear policy, the right tools, and a proactive approach, small businesses can handle annual leave confidently and efficiently. It’s not just about cover, it’s about creating a workplace where rest is respected and planning is prioritised.