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16th November 2018

Legal Issues – Is a ‘use it or lose it’ approach to holiday still lawful?

Background

UK law in relation to holidays comes from two primary sources. On the legislative side, the Working Time Regulations (WTR) are based on the European Working Time Directive (WTD), and stipulate (among other things) the minimum amount of holiday that employers must allow.

On that point, the WTR and WTD diverge, with the WTD giving an annual entitlement of four weeks’ holiday per year, but the WTR allowing UK employees an additional 1.6 weeks.

That difference is significant in relation to the other primary source of law on holidays, which is case law. Many of the rules applicable to holidays have been decided in the courts and tribunals instead of in parliament, such as the obligation to allow holiday to be carried forward where the employee has been unable to take it due to sickness absence.

The distinction between the WTR and the WTD allowances is particularly relevant in that much of the case law in the European courts relates only to the four weeks of leave given under the WTD, and not the full 5.6 weeks given under the WTR. For example, the rules on allowing carry-forward due to sickness absence apply only to the first four weeks of holiday. That means that if an employee has taken four weeks’ holiday but hasn’t been able to take the extra 1.6 weeks, there is no need to allow the remainder to be carried forward.

While carry-forward must be allowed in certain circumstances, until now many employers have adopted a ‘use it or lose it’ approach to holidays outside of those circumstances. In short, if employees haven’t been prevented from taking holidays, their choice not to take them has simply meant that any accrued holiday not taken at the end of the holiday year is lost.

However, the European Court of Justice (ECJ) has recently set down two new decisions that could again change the legal landscape on holidays.

The cases before the ECJ

The cases in question, Kreuziger v Land Berlin and Max-Planck-Gesellschaft v Shimizu, both originated from the German courts. Under German law, employees will receive a payment in lieu of accrued holiday on termination only if their employer had prevented them from taking it.

Essentially, this means that employees should ask to take their accrued leave before being entitled to a payment in lieu of it on termination. That rule differs from the WTR, which always allows a payment in lieu of accrued holiday at the end of the employment.

The employees in question did not ask to take their accrued holiday before leaving their employer, but Mr Shimizu was told by his employer in writing that he should take his outstanding holiday before finishing up.

Mr Kreuziger requested a payment in lieu of five months’ worth of accrued holiday. Mr Shimizu went further by asking for a payment in lieu of holiday accrued over two years, amounting to 51 days. Both requests were rejected by their employers, who relied on the German law outlined above. The cases were eventually referred to the ECJ.

The ECJ’s decision

The ECJ’s decision sets out three principles, which apply to the UK as well as to the other Member States of the European Union:

  1. Employees are seen as being the less powerful party in the employment relationship and that imbalance of power means that employers must not do anything to deter employees from taking holidays.
  2. Employers must take steps to ensure that employees take holiday by informing them of their entitlements and ‘encouraging’ them to take holiday.
  3. The information given under point 2 must be accurate and explain when entitlements will expire, such as at the end of the holiday year. In addition, the information must be provided with enough time for employees to arrange for holidays to be taken.

What does this mean?

This decision could have wide-ranging consequences on a number of fronts. Firstly, it means that employers will have to be sure that they give out written information on the amount of holiday that their employees can take and how to apply for it.

That may not be an issue for most employers, as holiday information tends to be expressed in either the employment contract or a holiday policy. However, many employers also engage workers (such as zero-hour or casual workers), who may receive less detailed information if they get a contract at all. This decision also applies to those workers, meaning that employers may have to revise their written documentation accordingly, or issue more comprehensive terms to workers.

The requirement to ‘encourage’ employees (and workers) to take holiday could be more troubling still. The ECJ appears to suggest that employers should actively take steps to ‘nudge’ employees who haven’t taken their holiday entitlement to do so. Plus, that ‘nudge’ must be given in enough time to allow any accrued holiday to be taken.

Employers might be able to meet that obligation by, perhaps three to six months before the end of the holiday year, issuing a communication to the workforce to remind them of their right to take holiday with a direction to take it. However, it is not fully clear whether a general memo of that kind would suffice, or whether individual employees who haven’t taken their entitlement should be contacted specifically with an indication that they should do so.

If the latter is true, employers may have to diarise a review of holiday taken to date by each employee and send out individual reminders that they will lose their entitlement if they don’t take it. That of course could present a significant administrative burden depending on the size of the organisation.

Another option might be for employers to use their right under the WTR to compel an employee to take holiday. To exercise that right, an employer must give notice of at least twice the holiday to be taken. For example, to require an employee to take a week’s holiday, the employer must give two weeks’ notice. This may not be necessary if the employer takes the ‘encouraging’ steps referred to above, but could be kept as a last resort where they haven’t done so.

One small consolation may be that these rules apply to only the WTD holiday entitlement of four weeks, and not to the full UK 5.6 week entitlement. Therefore, if an employee has taken at least four weeks of leave, there is no need to encourage them to take any more. However, that most likely won’t remove the burden of having to monitor the number of holidays taken by employees each year.

If you have any questions on any of the issues raised in the above article, please contact Seanpaul McCahill.

16th November 2018