Holiday - Another exception to the use it or lose it principle?

Summary

In a further significant departure from the “use it or lose it principle”, the ECJ has held that untaken holiday is not automatically lost at the end of the holiday year if the worker failed to take it.

What is important is whether the employer can show that it enabled the worker to take their remaining holiday before the end of the holiday year. If the employer cannot show it gave the worker sufficient information in that respect, the untaken holiday will be carried forward to the next holiday year.

The knock on effect of this is that workers may be entitled on termination of employment to payment in lieu of accrued but unused holiday spanning more than one holiday year.

Facts of the cases

The ECJ was asked by the German courts to give judgement in two German cases:

1. The Shimizu Case

Mr Shimizu had 53 days accrued but unused holiday spanning two holiday years. A few months prior to the termination of his employment his employer asked him to take his remaining holiday entitlement but it did not make him do so. Mr Shimizu only took two days holiday before his employment ended and requested payment in lieu of his remaining holiday entitlement.

2. The Kreuziger Case

Mr Kreuziger did not take any holiday in the last few months of his employment and asked his employer to pay him in lieu of his outstanding holiday on termination.

In both cases the employers refused to pay in lieu of the remaining holiday, relying on German law which provides that workers are only entitled to payment in lieu of untaken holiday if their employer has prevented them from taking it.

Although the national courts held that under German national law these employees were not entitled to payment because they could have taken their holiday, they doubted that this was compliant with the Working Time Directive and referred the matter to the ECJ.

ECJ Decision

The ECJ held that national laws cannot provide for the automatic loss of accrued but untaken holiday on termination or, critically, at the end of the relevant holiday year unless the employer can show that it had enabled the worker to exercise their entitlement, particularly through the provision of sufficient information.

It held the employer is required to:

“ensure, specifically and transparently that the worker is actually given the opportunity to take the paid annual leave to which he is entitled, by encouraging him, formally if need be, to do so, while informing him, accurately and in good time… that if he does not take it, it will be lost…”

The ECJ further held that if the employer is able to show that a worker “deliberately and in full knowledge of the consequences” refrained from taking the untaken holiday after being given the opportunity to do so, the Working Time Directive allowed for that holiday to be lost and/or for the right to be paid in lieu of such holiday to be lost.

Comment

It is worth noting a couple of important points from a UK perspective:

1. Unlike the German equivalent, as the Working Time Regulations 1998 give workers in the UK an unqualified right to payment in lieu of untaken statutory holiday on the termination of employment the ECJ’s judgment in this respect is not surprising.
2. The ECJ’s ruling only relates to the first four weeks of statutory holiday under the Working Time Directive. It does not apply to the additional holiday provided for under the Working Time Regulations 1998 or any additional holiday granted under a contract of employment.

However, the ECJ’s judgment in relation to the carry-over of statutory holiday from one holiday year to the next has potentially significant implications for UK employers.

The ECJ’s judgment suggests that an employee will be able to carry over their statutory holiday entitlement from one holiday year to the next unless the employer has (and can prove they have):

1. taken active steps to “specifically and transparently” give its workers the opportunity to take their holiday;
2. actively encouraged workers, formally if need be, to take their holiday; and
3. warned its workers in good time that they will lose it at the end of the relevant holiday year if they do not take it.

The judgment may lead to problems for businesses if workers are permitted to carry over and take disproportionate amounts of holiday in a holiday year. Further, on termination of employment employers might have to pay in lieu of untaken holiday which was accrued in previous holiday years and not just the current year.

In our view employers should review their practices and put in place measures to regularly remind workers throughout the holiday year of their remaining holiday entitlement and, at the same time, remind them of the consequences of not taking it. We suspect it is unlikely that a one off reminder towards the end of the holiday year will be sufficient to meet the ECJ’s requirement for this information to be given in “good time”.