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Denmark: Holiday Act changes bring extra five weeks’ pay

Talent|Total Rewards|Integrated Wellbeing

July 5, 2019

Current employees get five extra weeks of pay as employers adjust employment agreements and leave practices.

Employer action code: Act

Recent amendments to the Holiday Act will introduce concurrent accrual and usage of paid annual leave in the same leave year, replacing the current system under which new employees have to work for at least 12 months (in some cases up to 16 months) before they can take paid annual leave in the following leave year. The amendments were passed in response to European Commission ruling in 2014 that the Danish system was in violation of the European Union (EU) Working Time Directive, which provides that all (full-time) employees should receive a minimum of four weeks of paid annual leave per year.

The transition to accrual and usage in the same year is complicated by the fact that most current employees are already entitled to take leave accrued in the year prior. As a result, during the transition from the old system to the new, the statutory leave entitlement for these current employees will double, for one year only, from five to 10 weeks. This reflects leave accrued for their employment in the prior year under the old system as well as an additional leave accrual for the initial year under the new system. Otherwise, the statutory accrual rate of five weeks of leave per year will not change.

During the transition from the old system, statutory leave entitlement for current employees doubles, for one year only, from five to 10 weeks.

To avoid the potential workforce disruption of many employees taking 10 weeks of leave, transition to the new system will occur over two years, beginning January 1, 2019, not taking full effect until September 1, 2020, with five weeks of accrued leave (frozen leave) unavailable for employee use. Instead, the gross value of the frozen leave (including the related holiday bonus) will be paid by the employer to a new Employees' Fund for Residual Holidays (LFTF - Lønmodtagernes Fond for Tilgodehavende Feriemidler), with LFTF ultimately paying out the accumulated value of the frozen leave to the employee (at retirement eligibility or upon leaving the workforce). Employers will have to decide whether to pay the frozen leave value to LFTF by the September 2021 deadline, or to maintain a liability on their books until LFTF calls for payment when it pays out the frozen leave to the employee; in the interim, the frozen leave value will be subject to mandatory indexing according to a predetermined formula. The LFTF will be managed by Lønmodtagernes Dyrtidsfond (LD), which manages the normal holiday funds for hourly paid employees.

Key details

The main changes include:

  • For service during January 1, 2019, to August 31, 2019, leave accrues at 2.08 days per month and can be used between May 1, 2020, and September 30, 2020 (along with any unused leave carried forward).
  • Leave accrued for service from September 1, 2019, to August 31, 2020, (25 working days) will be considered frozen leave and unavailable for employee use.
  • Employers will be required to calculate the value of each employee’s frozen leave as of August 31, 2020; report the amount to LFTF by December 31, 2020; and by September 30, 2021 either pay that amount (indexed) to LFTF or notify them that the employer will be retaining the liabilities on their books (decided on an individual employee basis). In either case, employers will have to report the value of the benefit as accumulated holiday to the tax authorities. Employers that retain the liability must transfer the frozen leave amount (indexed) to the LFTF no later than the date the LFTF determines the benefit is payable to the employee (at retirement eligibility or upon leaving the workforce).
  • The transition will finish in September 2020 at which time employees can use statutory paid annual leave for a period of 16 months (from September 1 of a given year to the end of December the following calendar year).

Employer implications

In addition to incurring and accounting for the cost/liability related to an additional five weeks’ leave for current employees, employers will need to adapt their employment agreements, work rules and handbooks to reflect the new leave system and adjust their leave management practice to reflect concurrent accrual and usage. Some annual fund reporting will be required for frozen leave entitlements for staff, as well as ongoing administration and guarantee costs. The LD estimates that the total value of the accumulated frozen leave benefit will be approximately DNK 100 billion (about USD 15 billion) and has indicated that it will manage the funds to achieve the highest possible return on investment. As the value of the frozen leave equals almost 10% of an employee’s current annual pay, which could be retained for 40 years or more, this could significantly impact employee retirement savings.

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