153: Holiday pay under the Working Time Directive cannot be reduced to reflect short-time working

Under the EU Working Time Directive, workers have a right to at least four weeks’ paid annual leave. In the German case of Hein v Albert Holzkamm GmbH, the European Court of Justice (ECJ) has held that a worker’s holiday pay in respect of this right cannot be reduced to reflect a period of short-time working.

Mr Hein was employed in the German construction industry under the terms of a collective agreement which entitled workers to 30 days’ paid holiday per year, accruing at the rate of one day of leave for every 12 days of employment, excluding certain absences. The collective agreement allowed employers to reduce holiday pay for periods when workers were receiving an allowance for short-time working, during which they did no work but their employment continued. In 2015, Mr Hein was on short-time work for 26 weeks. In 2016, he took 30 days’ leave accrued during 2015. He brought proceedings alleging that his holiday pay for this period should not have been reduced to reflect his short-time working, which meant he received significantly less than his normal remuneration. The German court referred his claim to the ECJ.

The ECJ noted that the purpose of paid annual leave under the EU Working Time Directive is to enable a worker to have a period of relaxation and leisure, based on the premise that the worker actually worked during the reference period to accrue their entitlement. Whilst member states can provide enhanced entitlements, under the Directive a worker would therefore not accrue annual leave during a period in which they were not working because they were on short-time work. As established in previous case law, holiday pay in respect of the minimum four weeks’ leave provided by the Directive must be not less than normal remuneration so that workers are not discouraged from taking annual leave. The ECJ held that national legislation which allows collective agreements to adjust holiday pay to take account of reduced earnings due to short-time working therefore amounts to a breach of the Directive.

During 2015, given that he had not worked for 26 weeks, Mr Hein had accrued only two weeks’ paid holiday under the Directive, although he was entitled to more under the collective agreement. Since his holiday pay for this two weeks should have reflected the average normal remuneration he received whilst working, it could not be reduced to take account of his short-time working.

The ECJ also made some comments about the inclusion of overtime in holiday pay. It suggested that remuneration received for overtime of an ‘exceptional and unforeseeable nature’ does not need to be included since it does not form part of normal remuneration. However, where a worker is contractually obliged to work overtime on a ‘broadly regular and predictable basis’ and overtime pay constitutes a significant element of their total pay, this would amount to normal remuneration and should therefore be included in holiday pay.

This decision highlights the need to treat the accrual of annual leave and the calculation of holiday pay as two separate aspects of a single right. The ECJ has confirmed that the entitlement to four weeks’ leave under the Directive accrues only during periods of actual work completed under the employment contract, and that the holiday pay for those weeks should equate to the average normal remuneration received during periods of actual work. The ECJ also suggests that voluntary overtime does not need to be taken into account when calculating holiday pay if it is non-contractual. However, in the UK, case law has established that there is no requirement for work to be done in order to accrue holiday as a worker. In addition, under current UK case law, voluntary overtime that is sufficiently regular to qualify as ‘normal’ must be included and should not be excluded as a matter of principle because it is voluntary. This issue may be clarified when the Court of Appeal hears the appeal in Flowers v East of England Ambulance Trust later this year.