Can Staff Take Their Leave When Payment in Lieu Is Payable?

Three recent cases highlight why you should encourage your employees to use their holiday entitlement.

The purpose of Article 7 of the Working Time Directive (2003/88/EC) (the WTD) is to ensure that EU Member States implement domestic legislation that grants workers entitlement to paid annual leave of at least four weeks per year. Article 7 also states that paid annual leave cannot be replaced by payment in lieu – except where the employment relationship is terminated.

The Cases

Kreuziger v Land Berlin and Max Planck v Shimizu: In these separate cases, the claimants were seeking to be paid in lieu of untaken annual leave on the termination of their employment. In Mr Shimizu’s case, he was claiming payment in lieu for untaken holiday entitlement for the current year as well as the preceding year.

Stadt Wuppertal v Maria Bauer and Volker Willmeroth v Martina Brobonn: In both cases, the claimants were the sole heirs to the estates of their late husbands who had died while in employment. They were claiming payment in lieu for annual leave entitlement that their husbands had not taken before their deaths.

Findings

In all three instances, the ECJ have emphasised the importance of paid annual leave as a principle of EU social law from which there may be no derogations. The ECJ also reiterated the aims of the WTD and Article 31(2) Charter of Fundamental Rights of the European Union (the Charter) being to ensure that workers have sufficient rest from the work they do in their jobs and to have a period of relaxation and leisure.

On termination of employment, including when terminated by the death of the employee, domestic legislation should not provide for automatic loss of annual leave entitlement. The employee, or the heir to their estate, should be entitled to payment in lieu for any such untaken annual leave.

Annual leave entitlement from an earlier leave year is not automatically lost just because the employee failed to request to use it. To be able to show that payment in lieu for such leave is not owed to the employee, the employer must be able to demonstrate that they provided the employee with the opportunity to take the leave and made them aware of the circumstances under which the entitlement would be lost.

Although these findings relate to German cases, the effects are relevant to the UK as the ECJ confirmed in all three instances that the rights to paid annual leave under the WTD and the Charter are directly enforceable between private persons and National courts must interpret domestic legislation in accordance with both the WTD and the Charter. Where domestic legislation is entirely incompatible, the WTD and the Charter take precedence.

Best Practice

The findings suggest that untaken annual leave may not automatically lapse at the end of the holiday year, raising the possibility that on the termination of employment, an employee might be entitled to be paid in lieu of their total accrued entitlement (whether accrued in the current or previous leave years).

For the entitlement from earlier leave years to lapse, employers need to be able to show that they have provided their staff with the opportunity to take their paid annual leave. What exactly would qualify as sufficient ‘opportunity’ is not totally clear, however the ECJ noted that employers are required in particular ‘to ensure, specifically and transparently that the worker is actually given the opportunity to take the paid annual leave… by encouraging him, formally if need be to do so while informing him accurately and in good time…and that if he does not take it, it will be lost.’

We would therefore recommend that employers ensure through their policies and HR systems that employees are aware of the need to take annual leave in the leave year it arises, any policy on carry over and  the procedure for booking and taking that leave. We would also recommend including a reminder of the consequences of not taking their annual leave entitlement in these communications.

Employers may choose to have a policy that requires employees to use up accrued holiday after notice of termination has been served. Whether such leave is actually taken will still need to be monitored. These decisions will only apply in respect of the four weeks annual leave granted under the WTD and implemented into domestic law by the Working Time Regulations 1998 and will therefore not apply to the extra 1.6 weeks granted under the Regulations and any contractual holiday entitlement over and above this.