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Holiday Pay: Important new case on ‘carry over’ and pay in lieu of annual leave

The European Court of Justice reminds us that the subject of holiday pay is far from dead and buried.

Recently, all has been relatively quiet in the Employment Tribunals on the subject of holiday pay. However, an important new case from the European Court of Justice reminds us that this issue is far from dead and buried.

In the combined German case of Kreuziger v Berlin/Max Planck Gesellschaft v Shimizu, the ECJ grappled with the right to a payment in lieu of accrued annual leave and the circumstances in which untaken leave might carry over into a subsequent leave year.

What happened?

Mr Kreuziger was a paid legal trainee with the Land of Berlin (a department of the German state) between May 2008 and May 2010. During the last five months of his traineeship (i.e. from January 2010 onwards) he refrained from taking paid annual leave. After his traineeship ended, he requested a payment in lieu of the days of leave accrued in that five month period, which he had not taken.

Mr Shimizu was employed as a researcher by a scientific research institute. Two months before the end of the employment relationship, Mr Shimizu was invited by his employer to take his remaining leave (suggesting some dates but making clear that it would not force him to take leave). Mr Shimizu only took two days off and requested a payment in lieu of the annual leave not taken. This amounted to 51 days of leave spanning two different leave years.

German law states that workers may only receive a payment in lieu of untaken leave on termination of employment if their employer has prevented them from taking it. This is different from the position in the UK where the right to payment in lieu of accrued but untaken statutory leave on termination is unqualified. Neither Mr Kreuziger nor Mr Shimizu had asked to take any of their outstanding holiday entitlement before they left.

The German Courts asked the European Court of Justice to clarify whether it was permissible for national law to provide for the automatic loss of annual leave (or the right to pay in lieu of annual leave) on termination, on the basis that the employee had not asked to take it.

The decision

The Court held that under the Working Time Directive a worker does not automatically lose their accrued but untaken holiday entitlement at the end of the reference period.

It held that national law cannot provide for the automatic loss of accrued but untaken annual leave at the end of the reference period unless the employer can show that it enabled the worker, in particular through the provision of sufficient information, to take the holiday before the end of the reference period.

The ECJ took the view that the worker is the ‘weaker party’ in the employment relationship and so it is important to safeguard their rights. An employer must be able to show that the worker was provided with sufficient information about their right to paid holiday and was enabled to actually exercise that right. Otherwise, a worker might lose the benefit of a right that they effectively know nothing about or were not permitted to exercise by their employer.

Does UK law need to change?

UK domestic law states that the statutory four-week leave entitlement which derives from the Working Time Directive may only be taken in the leave year in respect of which it is due – Regulation 13(9)(a) Working Time Regulations 1998. In other words, it must be taken in the year to which it relates or else it is lost. In normal circumstances, it cannot be ‘rolled over’ and taken in a subsequent leave year.

The additional 1.6 weeks leave available under the UK Regulations, and any additional leave offered by the employer, may be rolled over to the following leave year in accordance with a relevant agreement (e.g. the contract of employment).

In this decision, the ECJ looked at the Working Time Directive and at German domestic law on working time. It did not look at or directly comment on the wording of the UK domestic Working Time Regulations.

However, these Judgments seem to suggest that Regulation 13(9)(a) must be read as subject to an important proviso; that the employer has enabled the employee to take leave. The position appears to be that Regulation 13(9)(a) will only be compatible with EU law where a Tribunal or Court is satisfied that the employee was aware that they were able to take paid leave and was enabled by their employer practically to do so.

It remains to be seen whether these decisions will generate any UK litigation and, if so, how the UK Courts will interpret the Working Time Regulations 1998 in consequence.

What does this mean for me?

The effect of this decision is that the ‘use it or lose it’ principle in respect of statutory holiday will only operate if the employee is given proper information about their right to paid holiday and is enabled to take it by their employer.

If a worker has not received sufficient information or been enabled to exercise the right to take paid holiday then, under German law, they would be entitled to payment in lieu of accrued but untaken leave even if they had not asked to take it during the reference period. This is not really an issue in the UK, where the right to payment in lieu of the four week statutory leave period on termination is unqualified in any event.

However, more significantly, the ECJ stated that, in these circumstances, accrued leave would carry over to the next leave year rather than expiring at the end of the reference period. In the UK, this might mean that an employee would be entitled on termination to payment in lieu of accrued but untaken leave spanning multiple leave years.

Actions for employers

Essentially, the case is saying that an employer is under an obligation to remind staff of their right to take paid annual leave and of the ‘use it or lose it’ principle.

The question of how far an employer must go to enable an employee to take leave is tricky. In Shimizu, the Court referred to the employer exercising “all due diligence in enabling the worker to actually take” their paid leave. Some practical action points are below:

  • The right of most employees to paid annual leave will be set out in the contract of employment or statement of terms and conditions. This should be sufficient to demonstrate that the employee was aware of their right to paid annual leave.
  • However, some staff who are not employees may still be entitled to paid annual leave (e.g. workers). You should make sure that these groups have been explicitly made aware of the right to paid annual leave (e.g. through their contracts of service or other communications).
  • When and how frequently reminders are sent will be at your discretion. However, it would seem sensible to send a reminder at the half-year point, again approximately three months later, and again a month before the end of the year (to allow sufficient time for an employee to schedule periods of leave).
  • These decisions make clear that you are not obliged to force an employee to take leave. However, you may wish to do so in some circumstances (for example if an employee has taken no leave at all despite encouragement, or where there is a health and safety concern).
  • If leave is to be enforced, the employee should be given at least twice as much notice as the period of holiday (so at least two week’s notice for one week of leave) or whatever period of notice is specified in the contract.
  • These decisions may encourage arguments that, while an employee was aware of his or her right to paid leave, their workload, workplace culture, absence of effective cover arrangements or the attitude of line management was such that they were not encouraged or enabled to take leave. It is difficult to deflect such arguments, as a reluctance to take leave may arise from the employee’s personal perception of their work situation rather than operational reality. However, issuing regular reminders will hopefully demonstrate that you are committed to encouraging staff to take adequate leave, and have given them the opportunity to raise any specific issues preventing them from doing so.
  • Any issues raised by individual members of staff as preventing them from taking leave should be engaged with, and addressed, as far as possible. For example, if an employee has taken very little holiday and is approaching the end of the leave year, could any of their diary appointments or other commitments be rescheduled to allow them to be away from work at the relevant time?
  • It is important to note that these decisions apply to the first four weeks of leave available under the Working Time Directive only. You are not obliged to encourage employees to take the additional 1.6 weeks leave available under the Working Time Regulations or any additional contractual leave (although obviously, you may do so if you wish).
  • It is also important to remember that different rules apply to staff who have failed to take statutory holiday because of maternity leave or sickness absence, where carry-over will usually be permitted. If you are unsure we would be happy to advise you.

If you have any questions or concerns about this case and its implications, contact our employment lawyers.

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