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Holiday Pay – The Latest Evolution in the Case Law

Employment Law & HR

A recent decision of the European Court of Justice (ECJ) in two German cases has provided further guidance on the interpretation of the annual leave provisions in the EU Working Time Directive.

The Facts

Under German legislation, workers are only entitled to payment in lieu of accrued holiday upon termination of employment if their employer has prevented them from taking it. Simply put, workers have to ask to take all their outstanding leave first.

Claimants brought separate claims for payment in lieu of holiday upon termination and these were referred to the ECJ by the national courts to decide whether the law in Germany was compatible with the EU Working Time Directive.

The Decision

The ECJ noted that the Directive allows member states to set conditions under their national legislation on the right to a payment in lieu of accrued holiday, including a provision that unused annual leave will be lost at the end of the leave year. However, the ECJ held that member states cannot legislate for an automatic loss of holiday or holiday pay, unless the worker has been given an effective opportunity to take the holiday.

In the Court’s view, it could not be left solely to workers to ensure they exercise their rights effectively, because workers are considered the weaker party in this situation, and the law must guard against the possibility that they will be dissuaded from exercising their right to take holidays.

The ECJ held that that employers must therefore actively encourage workers to take their leave and inform them, in good time, that the leave will be lost if it is not taken. If employment terminates and the employer cannot show that they have taken these actions, the right to payment in lieu must include the total accrued but untaken entitlement. In essence, workers should only lose their leave entitlement or pay in lieu if they have knowingly and deliberately refused to take their holidays in full knowledge of the consequences.

Implications for your business

Although UK law differs from German law, this case has a knock-on effect for UK employers. The prohibition in the Working Time Regulations 1998 on carrying over the four weeks’ statutory holiday must now be read alongside this judgement. As a matter of good practice, we would advise that employers consider sending out written reminders to workers about annual leave entitlement, encouraging them to take it and informing them clearly that leave will be lost if it is not taken. This should to be done in sufficient time before the end of the relevant leave year.

Holiday pay is a notoriously complex area of law and if you require any assistance, please contact your dedicated Employment Solicitor today.

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