The ECJ has handed down judgment on 6 November 2018 in Kreuziger v Land-Berlin and Max-Planck-Gesellschaft, a case concerning the circumstances in which the right to compensation in lieu of annual leave on termination of employment may be lost. The ECJ concluded that a worker cannot automatically lose his acquired right to paid annual leave because he did not apply for leave.

Mr Kreuzinger was a legal trainee with the Land of Berlin, Germany between May 2008 and May 2010. From 1 January 2010 to the end of his traineeship he did not take any annual leave. When his traineeship terminated, he requested an allowance in lieu of his accrued untaken annual leave. The request was refused on a number of grounds, including that the allowance in lieu of leave provided for by the Working Time Directive (WTD) is based on the premise that the individual was unable to take leave for reasons not attributable to him. Mr Kreuzinger brought a legal claim. The Higher Administrative Court Berlin-Brandenburg made a reference to the ECJ to determine whether the right to an allowance in lieu of paid annual leave may be precluded where the worker failed to apply for the leave he was entitled to, although he had been in a position to do so and whether more generally that right is based on the premise that the worker had not been able to exercise his right to paid annual leave before employment terminated for reasons beyond his control.

The ECJ noted that the provision of the WTD which provides for an allowance in lieu on termination of employment (Article 7) does not lay down any condition for entitlement to the allowance other than (1) that the employment relationship has ended and (2) that the worker has not taken all the annual leave to which he was entitled on the date the relationship ended. It is apparent from the ECJ case law that Article 7 must be interpreted as meaning that it precludes national legislation or practices which provide that, on termination of the employment relationship, no allowance in lieu of paid annual leave is to be paid to a worker who has not been able to take all the leave to which he was entitled before the end of that employment relationship.

The ECJ said that the holiday pay required by Article 7 is intended to enable the worker actually to take the leave to which he is entitled. By providing that the minimum period of paid annual leave may not be replaced by an allowance in lieu, except in the event of termination of the employment relationship, Article 7 aims to ensure that workers are entitled to actual rest. Article 7 does not in principle preclude national legislation which lays down conditions for the exercise of the right to paid annual leave, including loss of that right at the end of a leave year or a carry-over period, provided that the worker has actually had the opportunity to exercise the right to leave. However, it is important to ensure that the application of national law cannot lead to the loss of the right to paid annual leave even though the worker has not had the opportunity to exercise that right.

The ECJ said that the worker must be regarded as the weaker party in the employment relationship and it is therefore necessary to prevent the employer from being in a position to impose on the worker a restriction of his rights. Any practice or omission of an employer that may potentially deter a worker from taking his annual leave is incompatible with the purpose of the right to paid leave. It is important to avoid a situation in which the burden of ensuring that the right to paid annual leave is actually exercised rests on the worker, although that does not extend to requiring employers to force their workers to exercise their right to leave. The employer is required to ensure, specifically and transparently, that the worker is actually given the opportunity to take the paid annual leave to which he is entitled by encouraging him, formally if need be, to do so, while informing him, accurately and in good time, that if he does not take it, it will be lost at the end of the holiday year or carry over period, or on termination of employment where the termination occurs during such period. The burden of proof is on the employer; if the employer cannot show that it has exercised all due diligence in order to enable the worker actually to take his paid annual leave, it must be held that the loss of the right to leave or to an allowance in lieu constitutes a failure to have regard to Article 7. However, if the worker refrained from taking the annual leave deliberately and in full knowledge of the ensuing consequences after having been given the opportunity to exercise his right to annual leave, Article 7 does not preclude loss of the right or the allowance in lieu.

Therefore, Article 7 would preclude any national legislation in so far as it entails that, in the event the worker did not ask to exercise his right to paid annual leave prior to the termination of employment, that worker loses his right to an allowance in lieu of leave automatically and without prior verification of whether the employer had in fact enabled him to exercise his right to leave, in particular through the provision of sufficient information.

This decision has significant implications for UK employers as it indicates that the ‘use it or lose it’ provisions of the Working Time Regulations 1998 may be incompatible with the WTD in situations where employers have not provided sufficient information to workers to enable them to actually exercise their right to leave. Employers should consider whether to issue reminders prior to the end of the leave year encouraging employees to take their leave and informing them that unused leave will be lost. The alternative may be that accrued untaken leave may be carried over indefinitely. This is particularly a risk where the employees may be able to claim that the culture of the workplace or the workload discourages the taking of leave.