Holiday “use it or lose it” policies not always lawful

Many employers operate a policy which states that holiday can’t usually be carried over from one holiday year to the next, so if a worker doesn’t take all of their leave days in that year, they will cease to be entitled to them.

Under the EU’s Working Time Directive (currently part of UK law under the Working Time Regulations 1998), employers must ensure that workers are entitled to paid annual leave of at least 4 weeks per year. In England and Wales, this is supplemented by the right to 8 bank holidays. This minimum period of paid annual leave cannot be replaced by a payment in lieu except where the employment relationship is terminated. 

In the jointly-heard cases of Kreuziger v Berlin and Max-Planck-Gesellschaft v Shimizu, the ECJ held that even if a worker doesn’t exercise their right to paid annual leave in the holiday year by taking all of their allotted holidays, the right to leave isn’t lost unless the employer has “diligently” put the worker on notice that they will lose it. Both cases involved employees who had saved up holiday until the termination of their employment, and were then refused payment in lieu by their employers because they hadn’t attempted to take the holiday.

The ECJ ruled that the burden is on the employer to tell their workers to “use it or lose it”. Employers don’t need to force their workers to take leave, but they must clearly inform them of their rights and do so in good time – and must also tell them that holiday will be lost if it is not used. If they don’t do this, employers may be liable to pay for a large amount of accrued holiday. 

Best practice for employers would be to:

  1. Make it clear to your staff that they have the right to paid annual leave and in what circumstances this right will be lost.

  2. Encourage your staff to take their holiday entitlement steadily throughout the holiday year, and ensure that you have written records of any such communications to them.

  3. Make sure you have a written policy in place which clearly sets out the rules.

  4. Review policies and contracts regularly to ensure they keep up with employment law developments such as the above ECJ cases.