Right to compensation in respect of unused paid leave

The European Court of Justice has recently ruled that an employee has the right to be paid an allowance in lieu of any days of paid annual leave which are left outstanding upon termination of employment.

The case, which was brought to the European Court of Justice, concerned an Austrian Civil Servant who decided to retire. In the months prior to the agreed date of retirement, the employee fell ill and made use of his sick leave, and as a result, he was unable to make use of his remaining paid annual leave. After retiring, the said employee requested compensation for the days of paid leave which he was unable to take.

The employer argued that in terms of Austrian law, a civil servant who terminates the employment relationship on his own accord, particularly in the case of voluntary retirement, is not entitled to claim an allowance in lieu of accrued and unutilised, days of leave.

Therefore, a preliminary ruling was requested by the Verwaltungsgericht Wien (Administrative Court of Vienna), asking for clarification from the European Court of Justice on the following point:  Should Austrian law allow for compensation for days of unused leave, in the case of voluntary termination by the employee, in terms of Directive 2003/88/EC, the EU Working Time Directive?

The Viennese Administrative Court also requested an outline of the conditions surrounding the granting of such an allowance.

The European Court of Justice has confirmed in multiple judgements that the provisions on paid annual leave are ‘an important principle of EU Social Law’ and should be granted to all employees, regardless of their state of health. In particular, Article 7 of the above-mentioned Directive clearly stipulates that each employee is entitled to a minimum of 4 weeks of paid annual leave and this annual leave may be replaced by an allowance only where the employment relationship is terminated. These provisions cannot be derogated from by Member States.

In view of the new ruling, the European Court of Justice has adopted the reasoning that once an employment relationship is terminated, since the employee is unable to enjoy the remaining paid annual leave, said employee has the right to receive pecuniary compensation for those days of leave he/she has not taken. This applies irrespective of the reasons for termination. Compensation may only be awarded following termination and not during the period of employment.

Member States, including Malta, must now ensure that local legislation is in line with the interpretation of Article 7 of the EU Working Time Directive provided by this preliminary ruling by the European Court of Justice and if necessary, make amendments to any provisions which are incompatible with this interpretation.

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