“Use it or lose it” approach to holidays -  Significant decisions from the European Court

As the year draws to a close, many employers are re-setting their "leave year" clock and the natural question of what will happen to any untaken annual leave entitlement arises. While Ireland's Organisation of Working Time legislation entitles all employees to 20 days' statutory leave in any given leave year (pro-rated for part-time staff), it is a matter for the individual employer whether to allow employees to carry over any part of their allotted holidays into the next "leave year".

However, two decisions of the European Court of Justice (the CJEU) handed down this month have shone a spotlight an employer's ability to adopt a "use it or lose it" approach to an employee's accrued annual leave entitlement.

What happened in Kreuziger v Land Berlin and Max Planck v Shimizu?

Both cases concerned employees who sought payment in lieu of accrued but untaken annual leave on termination of their respective employments. For example, in Mr Shimizu's case, he had accrued 51 days' annual leave over the course of 2 leave years. However, in both instances the relevant employer sought to rely on its "use it or lose it" annual leave policy, which, as permitted under national law, prohibited the carry-over of accrued annual leave into another leave year. The relevant German law only required payment in lieu of accrued leave where an employer had prevented the employee from taking their annual leave during the relevant year.

In considering the cases, the German court referred a question to the CJEU: whether an employee loses their right to be paid in lieu of accrued but untaken annual leave in circumstances where the employee failed to request such leave although they were in a position to do so (i.e. not prevented by their employer).

What did the European Court decide?

The CJEU confirmed that Article 7 of the European Working Time Directive expressly allows for an unconditional entitlement to payment in lieu of accrued but untaken annual leave – but only on termination of an employment relationship. Significantly, there is no scope for an employer to pay employees in lieu of accrued statutory annual leave unless their employment is ending. The Court confirmed that the objective of Article 7 is to ensure employees actually take the leave they are entitled to for the purposes of rest and relaxation to ensure "effective protection of their health and safety".

While Article 7 allows member states to prohibit carry-over or annual leave into the next leave year (the "use it or lose it" approach), this policy can only stand where the employee has actually had the chance to exercise their right to holidays.

Given that employees are regarded to be the "weaker" party in the employment relationship, the CJEU confirmed that employers should not have carte blanche to impose restrictions on an employee's right to take their holiday entitlement. Consequently, it is the employer that must be able to show, "specifically and transparently", that its employees were actually given the opportunity to take paid annual leave. The Court went a step further, finding that employers must be in a position to demonstrate that employees were "accurately and in good time" encouraged, "formally if need be" to take such leave.

It is only where an employer has discharged this onerous burden of proof, and the employee deliberately refrains from taking such annual leave "in full knowledge of the ensuing consequences, after having been given the opportunity" to take such leave, that the employer can rely on its "use it or lose it" approach.

What does this mean for employers?

Employers are not required to "force" employees to take holidays, but they must be able to show that they have "exercised all due diligence in enabling" the employee to take holidays.

This means that employees must be:

 (i) fully informed of their holiday entitlements and

(ii) actively encouraged to take their holidays.

But how high a bar is that in practice?

The concept of "active encouragement" is not defined in legislation, nor was it expanded upon in great detail by the CJEU in the above cases. So what practical steps should employers take now if they wish to continue to rely on their "use it or lose it" annual leave policy?

1. Annual Leave Policy: As a necessary first step, employers should ensure they have a clear and comprehensive annual leave policy in place. This policy should expressly set out an employees' entitlement to paid annual leave, identify the relevant "leave year" period for the respective employer and accurately detail its approach to carry over of accrued but untaken leave. Any "use it or lose it" policy should be specifically and transparently highlighted – in bold and underlined. However, given the recent CJEU decisions, simply having a perfect policy is unlikely to fully discharge the high burden of proof resting on employers' shoulders. It is probable that additional steps must be taken to demonstrate active encouragement.

2. Reminders: One such step in showcasing "encouragement" may be to keep track of employees' utilisation of their annual leave entitlement and issue "reminders" to staff as the relevant leave year draws to a close. In certain circumstances, individual employee reminders are recommended, for example, when dealing with employees who are absent on maternity leave or long-term sickness where annual leave continues to accrue.

In general, a company-wide approach, issuing a general "reminder" email to all staff each quarter, for example, and the month before the leave year expires, would likely "tick" the specific and transparent "formal notification" box. Whether it will sufficiently satisfy the "encouragement" test remains to be seen.

3. Encouragement: To actively encourage staff to take holidays, it may be advisable for employers, in tracking untaken leave, to meet with certain individual employees who have a substantial level of untaken annual leave days accrued.  A record of such conversations should be maintained. Such discussions may give rise to other HR issues to be addressed separately, for example, where a workplace culture is revealed as a result of which staff may feel discouraged from taking annual leave.

The above cases may have significant implications for employers in Ireland who have traditionally adhered to a "use it or lose it" approach to annual leave. It seems clear that policy alone is no longer sufficient and more proactive measures to ensure fully informed notification and encouragement to actually take holidays is required.

For more information in relation to this topic, please contact Ailbhe Dennehy, Senior Associate, or any member of the A&L Goodbody Employment Team.

Date published: 28 November 2018