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How to Set an Annual Leave Policy?

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An employee is entitled to paid annual leave under the Employment Ordinance(EO), it can be regarded as statutory annual leave, that is, the minimum requirement of paid annual leave. When setting the annual leave policy, the company should follow the EO, and the number of paid annual leave shall not be less than the number of days prescribed in the Ordinance.

How many days of paid annual leave can employees be entitled?

An employee is entitled to annual leave with pay after having been employed under a continuous contract for every 12 months. An employee’s entitlement to paid annual leave increases progressively according to his length of service. If an employee has been employed for continuously 12 months, an employee’s entitlement to paid annual leave is minimum of 7 days; If it is 9 years or above, an employee’s entitlement to paid annual leave is maximum of 14 days.

The above is the number of statutory paid annual leave. Of course, to attract and retain talents, most companies will give employees additional “paid annual leaves”. Normally, it is set as 12, 14 and 15 days. The number of paid annual leave is added according to the years of service.


How to distribute annual leave?

When talking about this topic, you need to consider the following aspects:

  1. Interval: monthly or yearly
  2. Leave Year: common leave year or based on employees join date
  3. Pro Rata Calculation: to calculate the paid annual leave for employees who joint the company in the mid-year
  4. Probation: how many days after joining the company can the employee start applying for leaves?
  5. Clear out the balance: follow the common leave year or based on employees join date
  6. Accumulate the balance: whether can carry forward to next year


  1. Set Annual Leave Interval

The annual leave balance in a year is often called the annual leave cycle by HR. The company can set its own internal rules. There are 2 common ways:

  • Monthly: either at the beginning of the month or at the end of the month. The most common method is to give the leave balance at the end of the month
  • Yearly: either at the end of the year or at the end of the year. The most common method is to give the leave balance at the beginning of the year


  1. The Basic Concept of Leave Year

Annual leave balance refers to the days in which you can enjoy the annual leave in a whole year. How to define the start date and end date of the leave year? It is usually divided into two concepts: “common leave year” and “employees join date as the start date of the leave year”.

Common leave year:

  • According to the EO, an employer may elect any period of 12 consecutive months as the common leave year for all of his employees
  • If an employee does not join the company at the beginning the common leave year, employer should calculate his leave entitlement on a pro rata basis
  • Employee’s different join dates will make their balance different in the first year

Employees join date as the start date of the leave year:

  • A joined the company on May 1, his leave year is from May 1 to April 30 in the following year
  • B joined the company on June 1, his leave year is from June 1 to May 31 in the following year
  • Employee’s leave balance is the same in the first year, but they all have different start/end date of the leave year


  1. Calculate employee’s leave entitlement on a pro rata basis

When an enterprise adopts the “common leave year” policy, let’s say, the leave cycle is from January 1 to December 31, employees who are employed in the mid-year can not enjoy the whole year’s leave balance. How to calculate?

For example, an employee who joined on July 1, and there are 184 days from July 1 to December 31. 2020 is a leap year, with 366 days in total. According to the company’s policy, there are 12 days annual leave, and the amount of leave balance for the employee this year is: 184 / 366 * 12 = 6 days


  1. Probation

Normally, new joiners have a three-month probation period, and some companies even extend to six months. The employer has the right to set that the employee can not apply for annual leave during the probation period. If the employee asks for leave, it can be regarded as no pay leave. Only after passing the probation period, and the employee has successfully become a regular employee, can he enjoy the benefits of the company.

Note⚠️: an employee cannot apply for annual leave during probation does not mean that there is no annual leave. The company needs to accumulate annual leave for employees in probation period.


  1. Clear out the balance

“Clear out the balance” means all the annual leave days accumulated by employees in the current leave year should be used up by the end of the current leave year. When the leave year ends, all unused annual leave will be cleared out, that is, it can not be used in the next leave year.

Leave year policies are different from companies, so the time for clearing out annual leave will also have differences.

For example, a company’s leave policy is to use a common leave year, from January 1 to December 31. In this year, there are 12 days of annual leave, but in this leave year, I only applied for 10 days, and there are 2 days unused. Therefore, I need to apply for the last two days of annual leave before December 31, which is called “clear out the balance”.

If the leave year set by the company is based on the employee’s join date, I was employed on July 2, 2019, and the company gave me 12 days of annual leave, and my leave year is from July 2, 2019 to July 1, 2020. However, in this leave year, I only applied for 9 days of annual leave, and there are 3 days unused. Therefore, I need to apply for the last 3 days of annual leave before July 1, 2020.


  1. Accumulate the leave balance

It has been mentioned above that some companies will require employees to clear out their leave, but this is not a compulsory requirement under the EO. Some companies consider that not all employees could clear out the annual leave at the end of the year, so they are allowed to accumulate certain days to carry forward to the next year. For example, if the annual leave is 12 days, employees are allowed to carry a maximum of 5 days forward to the next year.

It has to be said that the application, distribution and calculation of annual leave are the most complicated and restricted of all types of leave, especially when different companies have different policies. Leave Module is an important one in the human resource management system, especially whether it can support customization. For employers and HR, setting once-in-a-time can save a lot of time and energy spent on administrative work.

Workstem can help employers to determine whether employees can apply for leave or not based on their joined date and whether the unused annual leave can be carried forward to the next one according to the company’s policy. Strong and flexible customization can meet the different requirements in companies.



(The article on this website is intended to be for reference and general information purposes only. Workstem does not warrant or represent that such information is complete, accurate or up to date. It should not be treated as a complete and authoritative statement of law or court practice, or a substitute for professional legal advice.)

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