For many employers, the end of the calendar year also marks the end of the holiday year.

Some employees may have lots of accrued holiday left to take but not much time in which to take it. There is a scramble for time off at the end of the holiday year and employers may not be able to agree to all requests. So where does that leave employees who wish to carry over some of their holiday entitlement to the next holiday year?

Carry-over policies

Many employers have a policy that permits limited carry over. For example, we commonly see an option to carry over up to five days’ accrued holiday to be taken within the first three months of the next holiday year, subject to line manager approval. But in the absence of any specific rules, the default position is that the employees “use it or lose it” – meaning that if they have not taken it by the end of the holiday year, any accrued holiday is forfeited. This is subject to some exceptions, most notably where employees are unable to take their full holiday entitlement due to sickness absence (although the rules around this are quite complex).

It is also important to understand that payment in lieu of untaken holiday is only permitted on termination of employment. The UK Working Time Regulations (which implement the EU Working Time Directive) are clear on this. However, that principle has recently been called into question by the European Court of Justice (“ECJ”) in two German cases, based on the European Directive.

ECJ decisions

In Kreuziger v. Berlin, a trainee lawyer was employed in the public sector and sought payment in lieu of accrued but untaken holiday, which the state refused to pay. In Max-Planck-Gesellschaft v. Shimuzu, the employee was invited by his employer to take accrued leave before employment ended. He took only two days and claimed payment in lieu of holiday relating to 51 untaken days, accrued over the two preceding holiday years.

In those cases, the ECJ said that national law cannot allow the automatic loss of accrued annual leave entitlement (either on termination or at the end of the relevant holiday year) because the employee had failed to take it – unless the employer could show it had enabled the employee to take it through the provision of sufficient information.

Practical impact

In practice, this suggests that employers now need to take active steps to encourage employees to take their leave, before they can invoke the “use it or lose it” principle. If employees are not reminded that they need to take their holiday before the end of the holiday year, it appears that it can be carried over.

There may be some limitations on the period during which it can be carried over. Previous case law in relation to holiday carry-over in the context of long-term sickness has suggested 15 months is an appropriate backstop (although it will likely depend on the specific factual circumstances).

It is also worth noting that different rules may now apply, in theory at least, to different categories of holiday entitlement. Full-time workers are currently entitled to a minimum 4 weeks’ annual leave under the EU’s Working Time Directive, plus a further 1.6 weeks under the UK’s Working Time Regulations. They may also have additional contractual holiday on top of this.

The ECJ’s decision will likely only apply to the minimum 4 weeks’ annual leave provided for under EU law. This is because there is a direct contradiction between the decisions in Kreuziger and Shimuzu and the UK regulations, which state clearly that leave “may only be taken in the leave year in respect of which it is due”. Any additional contractual holiday will simply be governed by the terms of the employment contract.

In practice, employers could stipulate in the employment contract that EU minimum holiday entitlement is deemed to be taken first and no carry over is permitted. Provided the employee takes at least 4 weeks’ annual leave during the holiday year, this will negate the effect of the ECJ’s judgment.

Outside of this there is, of course, much to be said for employers simply reminding their staff to take holiday and actively encouraging them to spread annual leave across the year. The benefits of regular time away from work cannot be understated in terms of keeping employees refreshed, motivated and focused on doing a great job when they are at work.