4 considerations when introducing employee self-set pay or holiday

18 February 2020 | Applicable law: England and Wales

We have long become used to employers offering flexible benefit schemes where employees can choose from a range of benefits to best suit their circumstances. But there has been a recent evolution where employers seeking to offer yet more flexibility allow employees to choose their own level of pay and take unlimited holiday.

Giving this level of freedom can be a welcome benefit for employees, driving engagement and empowerment, as well as encouraging employees to take responsibility for their work and contribution to the business. If you are considering introducing one or both of these benefits, here are four key legal considerations to take into account.

How do these schemes work?

Whilst unlimited holiday schemes are all relatively similar – in that the amount of holiday employees can take each year is not capped, it is necessary to ensure that your employees are taking the statutory minimum amount of holiday and to be clear on what will be paid out on termination of employment if not enough holiday has been taken.

Self-set pay arrangements are more varied and complex. There are usually parameters and some checks and balances, but ultimately, it is up to employees to set their own pay. Employees will typically be asked to research and justify what they are proposing (for example, with reference to budgets) and there is usually scope for comment or feedback from other employees before the individual makes the final decision.

Understanding your employees

Understanding your workforce and how they may react to such a scheme is essential if you want to achieve greater employee engagement and retention. Some employees will enjoy the opportunity to decide their own pay and time off. Other employees will prefer more structure and guidance and without it will tend to take the bare minimum, not ask for significant pay increases, or will be anxious about having to justify their decisions. We can see this from instances where employers have implemented unlimited holiday schemes. In some cases it works well and employees take more holiday and remain as productive as ever. In other cases it does not and employers revert to a set amount of holiday. Bear this in mind for your business.

Pay increases and bonuses can also be a powerful motivator and indication to employees that they are valued. If employees set their own pay this incentive can be lost and you may need to look to other methods of recognising the efforts of your employees.

Whilst there is no one size fits all, self-setting schemes may not be successful if they apply to only part of the workforce or employees can opt in or opt out of them. Deciding what is appropriate for the entire workforce is key.

Leading by example and transparency

Managers must also be prepared to set an example to give confidence to employees in both taking holiday and setting their pay. If managers only take the minimum amount of holiday, for example, employees are unlikely to want to be seen to be taking more.

There is often a degree of transparency for employees about how much and when other employees are taking holiday. It may be beneficial to make this easier to see or give employees statistics such as the average amount of holiday being taken, or the range. However, you should be aware that this may simply serve to encourage employees to compete to take the least holiday out of everyone.

Transparency on pay is trickier and will depend on the process that is adopted for allowing employees to self-set pay. In smaller organisations complete transparency may be possible and employees can comment and feedback on their colleagues' pay proposals before the final decision is made. In larger organisations this is impractical and feedback may need to be limited to a smaller group of individuals, although the final decision remains with the employee.

A lack of complete transparency over the final amounts decided on may lead to some employees over-valuing or under-valuing their contributions. Where you are setting pay, you are able to harmonise pay for employees performing similar roles which can help to ensure that there are no pay discrimination issues – whether deliberate or inadvertent. Just because employees are setting their own pay, it is unlikely that an employer will be absolved of responsibility if it turns out that a group of employees (e.g. women, or those working part-time) are paid substantially less than other colleagues. Retaining some flexibility to harmonise pay or allowing employees in the same role to set their pay as a group may help with this.

You will need to consider all of this carefully in the context of your organisation and it will undoubtedly be sensible to remain vigilant to ensure that pay is fair across the entire organisation.

How to deal with unreasonableness

Whilst in practice most employees will not take an excessive amount of holiday, you will need to decide how to handle unreasonableness on the part of employees. This can be managed by still having a holiday approval process in terms of the timing of the holiday, even if the total amount of holiday is not capped. However, care needs to be taken on how this is implemented to avoid undermining the entire scheme.

Disciplining employees for taking excessive holiday is unlikely to be an option and you may need to consider reviewing or implementing performance or capability procedures if an employee is not delivering. Such procedures can take time.

With self-set pay there is likely to be feedback from other employees, which should limit the tendency of employees to set excessive pay. However, if an employee does set an unreasonable amount of pay it may not be straightforward to take action. Making an employee redundant in these circumstances is not likely to be an option as there is no decrease in the amount of work that is required. If you want to reduce pay you will need to get the employee to agree (which can undermine the self-set pay policy) or terminate the employee's employment on other grounds, most likely for 'some other substantial reason'. Such terminations are always more risky from an employer's perspective (where an employee has more than two years' service and therefore the right not to be unfairly dismissed). A well-crafted self-set pay policy should therefore include some measures or procedures for dealing with such issues.

Whilst this is new territory for many businesses, and there are many things to consider when allowing employees to set their own pay or holiday, if you consider the specific needs of your organisation and seek advice early on how best to implement these benefits, you can find the right balance for both you and your employees.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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