Use it or lose it? Not so simple when it comes to annual leave
The recent case law has shed some light on the situation where an employee has not used all their holiday entitlement before termination.
In two separate cases, Mr Kreuziger and Mr Shimizu did not use their full holiday entitlement and requested that their former employers make to them payments in lieu of their accrued but untaken holiday entitlement. Their employers refused to make such payment, relying on German law.
Unlike the UK unqualified right to payment in lieu of accrued but untaken statutory leave on termination, German law holds that workers may only receive such payment if their employer has prevented them from taking it.
Both individuals challenged their employer's decision. The German court referred this case to the ECJ to clarify whether national law could provide for the automatic loss of annual leave (or the right to annual leave) on termination of employment, on the basis that one had not requested to take it.
European Court of Justice decision
The ECJ stressed the importance of paid annual leave as a principle of EU social law, from which a country cannot derogate, and took the view that the worker/employee is the 'weaker party' in the relationship and so safeguarding their rights is critical. Notwithstanding the 'use it or lose it' approach in the Working Time Regulations 1998 (WTR), the ECJ stated that national law cannot, at the end of the reference period, provide for the automatic loss of accrued but untaken annual leave entitlement, unless the employer can demonstrate that it had enabled the individual to exercise his or her entitlement before the end of the reference period.
Does UK law need to be updated?
At the forefront of all employers’ minds is that domestic legislation means that the four-week annual leave entitlement may only be taken in the leave year in which it accrues, in line with reg 13(9) of the WTR and cannot be ‘rolled over’ to a subsequent leave year, save for the limited exceptions.
Although the decision in this case looks specifically at German domestic law on working time, this case appears to suggest that reg 13(9)(a) WTR must be read as subject to a chief proviso – that the employer has enabled the employee to take leave. There will, I expect, be litigation in the future, regarding whether an employer has given a worker an effective opportunity to take holiday and what constitutes this effective opportunity.
What does this mean for employers/HR professionals?
The effect of this decision is that the 'use it or lose it' principle in respect of statutory holiday will only operate if the employer has ensured "specifically and transparently" that the individual is given the opportunity to take the leave, even if they have not specifically requested to take it during the reference period. Luckily, this does not pose an issue in the UK, due to the unqualified right of payment in lieu of notice of the four-week statutory leave period on termination. However, the ECJ further stated that, in these circumstances, leave would carry over to the next leave year, as opposed to expiring. This may have a drastic impact in the UK, as it could result in an employee being entitled to payment in lieu of accrued but untaken leave spanning several leave years.
The decision suggests that employers will need to do more than simply put an appropriate policy in place. This is because failing to encourage staff to take their remaining leave may mean that employers are liable for (a) large sums of holiday pay entitlement should an employee exit the business; or (b) annual leave entitlement being rolled over to the following leave year(s), even if this contradicts express contractual provisions intended to prevent carry over. This may be a burden on the business and result in staff being absent for prolonged periods of time, as well as inefficiencies.
Best practice for employers
Examples of best practice which employers may adopt include:
- encouraging staff to take their holiday entitlement steadily and at various points throughout the year. Copies of these communications and reminders should be kept in case the matter become litigious.
- setting out an employee’s rights to annual leave in their employment contract and the circumstances surrounding this, to show they were aware of the circumstances around ‘using and losing’ their holiday entitlement
- being mindful that workers also have the right to annual leave and reminding them of this right through contracts of service and other communications
- keeping a policy with the holiday entitlement rules and ensuring individuals are aware of how to access this policy
- remembering that this decision makes clear that annual leave cannot be forced on individuals; however, keeping in mind that it may be encouraged in some circumstances, i.e. health and safety concerns
- listening to issues raised by individuals preventing them from taking leave and reacting to this appropriately.