In what circumstances do workers automatically lose right to payment in lieu of holiday?

The European Court of Justice (“ECJ”) has provided guidance on the right to payment in lieu for holiday entitlement accrued but voluntarily not taken in accordance with Article 7 of the Working Time Directive. Two German cases were referred for clarification on this matter (referred to below).

Article 7 of the Working Time Directive provides:
(1) Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions for entitlement to and the granting of such leave laid down by national legislation and/or practice.
(2) The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated.
This Article has generated a significant amount of case law, which includes the following general principles:
the right to paid annual leave; national rules can provide for the loss of the right at the end of the leave year provided the worker actually had the opportunity to take the leave; when the employment relationship ends it is no longer possible to take the leave so the worker is entitled to payment in lieu; and

Both cases were referred to the ECJ for clarification based on broadly the same question: does Article 7(2) of the Working Time Directive preclude national legislation which excludes the payment in lieu of untaken holiday on termination where the worker did not apply to take leave, even though they could have done so? In both cases the worker had terminated their employment relationship, and sought to claim their accrued but not taken annual leave as payment in lieu. Neither workers were prevented from taking the holiday by their employer and had ample opportunity to take it.

The ECJ held that the worker was entitled to this unless the employer could prove that it had enabled the worker to exercise their holiday entitlement, particularly through providing sufficient information. In one case the worker successfully claimed for two years’ worth of holiday entitlement, which means that reg. 13(9)(a) of the Working Time Regulations may not be fully applicable with European law as it is currently drafted.

• payment in lieu of this entitlement does not set out any conditions of entitlement other than the relationship has ended and the worker has not taken all of their annual leave.

Mr Kreuziger was a paid legal trainee employed by a German state entity, the Land of Berlin. He did not take any paid annual leave in the last months of his traineeship. Following termination, he requested an allowance in lieu of the days of leave which he had not taken, which the Land refused in reliance on national law. The German Court held that entitlement to accrued leave is predicated on the work not having been able to exercise their right to annual leave for reasons beyond their control. The Appeal Courts doubted this conclusion but referred the matter to the ECJ.

Mr Shimizu was employed by MPG. Two months before the end of the employment relationship MPG invited Mr Shimizu to take his remaining leave (without forcing him to take it on the dates it set). He only took two days and requested payment in lieu of 51 untaken days from 2012 and 2013. MPG refused. In the first instance Mr Shimizu was successful, but on appeal the courts considered that he was not entitled to the payment in lieu because he could have taken his leave. The Court was unsure whether this complied with the Working Time Directive and this was referred to the ECJ.

The ECJ held that national law cannot provide for the automatic loss of accrued but untaken annual leave entitlement on termination, or at the end of the relevant reference period, on the basis that the worker failed to seek to exercise their right to annual leave. This is unless the employer could show that it had enabled the worker to exercise their entitlement, particularly through the provision of sufficient information. The ECJ referred to the employer exercising “all due diligence in enabling the worker to actually take” their paid annual leave.

Secondly, it appears from this judgment that accrued untaken holiday cannot automatically lapse at the end of the holiday year (so it carries to the next year). If the employment then terminates, the right to payment is the total accrued untaken entitlement. Mr Shimizu successfully claimed for 51 days across two years. Regulation 13(9)(a) of the Working Time Regulations 1998 that implements the Directive, states that the four-week leave entitlement under that regulation may only be taken in the leave year in respect of which it is due. The ECJ’s judgment appear that this provision would be subject to the proviso the employer had enabled the employer to take the leave.

The ECJ clarified that Article 31(2) of the European Charter Fundamental Rights (“Charter”) can be directly enforced between private persons. Article 31(2) of the Charter provides that “every worker has the right to… an annual period of paid leave”. The Charter enshrines the fundamental rights and freedoms of individuals under EU Law and it applies to member states’ exercise and implementation of EU law.

It will be interesting to see if these decisions generate any litigation in the UK. Employers should be proactively encouraging workers to take their accrued holiday entitlement or may be responsible for paying in lieu the untaken entitlement. Employers have the burden to prove in the Courts that they have been proactively encouraging workers to take their holiday. If this is not documented properly, on termination of employment a worker will be able to recoup all accrued leave not taken across their entire employment. Failure to document and encourage could prove costly.