The current legal test for the reimbursement of unused statutory annual leave in Latvia

At some point, every employer has had to deal with employees who do not take all or part of their statutory annual paid leave (“annual leave”) for a long period of time. Irrespective of the reasons behind such behaviour, Section 149(5) of the Labour Law (Latvia) clearly provides, in the event of termination of the employment relationship, for the obligation of the employer to pay the employee compensation for the entire period for which the annual leave has not been used. Therefore, the dismissal or resignation of an employee may be very costly for an employer if the employee has not taken annual leave for several years. However, employers are often unaware that, according to current case-law, such a scenario can be avoided even if the employee does not want to go on annual leave at all. In this article we will explain, with practical examples, how to do so.

It follows from the judgments of the Senate of the Republic of Latvia (“Senate”) in 2019 and 2020, as well as the case-law of the Court of Justice of the European Union (“CJEU”), the right to compensation for unused annual leave may be lost in certain circumstances notwithstanding Section 149(5) of the Labour Law. In order to avoid paying compensation for annual leave, the employer must prove that:

  • it was, in fact, possible for the employee to take leave; and
  • the employer has drawn the employee’s attention to the consequences of not taking leave.

As the burden of proof lies with the employer, it is important for an employer to collect as much written evidence as possible for each of the preconditions during the employment relationship with an employee.

Evidence of the possibility to take annual leave

With regard to this precondition, where appropriate, the CJEU underlined the employer must formally encourage an employee to take annual leave. Irrespective of how the company in question organizes annual leave, in accordance with Section 150(2) of the Labour Law, the starting point is to find out an employees’ proposed timeline of annual leave. As the employer needs to provide sufficient evidence, this process should be formalized and a written survey of all employees should be conducted within the company. For example, an employer may periodically send e-mails to employees or issue an instruction (to be signed by the employee) to inform the employer of their planned annual leave within the next months (e.g. three or six months). It would also be useful to indicate in the instruction, by e-mail or in another written form how many days of leave an employee is entitled to within a given period. After the employees’ wishes have been collected, the employer may, in accordance with Section 150(1) of the Labour Law, prepare and notify the employees of a general annual leave schedule or a separate instruction on annual leave for each of the company’s employees.

If an employer finds an employee is not applying for annual leave or is not applying for it in a sufficient amount, the employer should remind the employee in writing again he must take annual leave. In addition, the standard approach should be for the employee to take the full four (4) weeks’ leave each working year, as under Section 149(3) of the Labour Law a two-week leave can only be carried over at the employer’s initiative (if the leave may adversely affect the usual operations of the company) and not just because the employee wants it.

If an employer has repeatedly informed employees about the possibilities to take annual leave in one way or another, then even in the event of a dispute, an employer will be able to prove with the accumulated written evidence an employee was able to take annual leave and the employer encouraged the employee to do so.

Evidence required for warning an employee of the consequences of not taking annual leave

The CJEU has upheld an employer must inform an employee accurately and in a timely manner that, if the employee does not take the annual leave, he or she will subsequently lose it. An employer may provide the information on the consequences of not taking annual leave, for example, in the employment contract, in the instruction on annual leave already described above (or in any similar document), as well as in reminders for employees who do not apply for annual leave. The more often an employer issues notices to an employee, the more likely it is the court will also find this precondition proven in the event of a dispute between the parties. The information to be provided in a notice could be worded as follows:

“We would like to inform you in accordance with Section 149, Paragraphs one, three and five of the Labour Law, an employee has the right to take four calendar weeks of annual leave in each working year, and the annual leave is not carried over to the next working year. If the employee does not take four weeks' annual leave in a given year, the employee shall lose the right to that annual leave and the employee shall lose the right to compensation for unused annual leave in the event of termination of employment."

The purpose of the paid annual leave is for employees to exercise their right to rest, not to receive a material benefit from not taking the annual leave.  The latter is the main reason for the case-law being favourable towards the employers. Following the recommendations in this article, an employer can ensure, in the event of termination of the employment relationship, an employer compensates an employee for unused annual leave only for the current working year and not for the entire duration of the employment.

Furthermore, where annual leave is not taken by a board member, other rules will indeed apply. First, it is important to identify the type of contract the company has with a board member – if it is not an employment contract, then the company’s relations with the board member will not be subject to Labour Law and his/her right to compensation for unused annual leave depends on the contract in question. However, if an employment contract has been concluded with a board member (which is by no means recommended), the board member may be entitled to compensation under the Labour Law (however, the case-law findings in this article will not apply for various practical reasons). Namely, a board member acts on behalf of the company as an employer and organizes the company’s operations, including other employees’ and his or her own leave, and therefore a board member’s objections about the impossibility of taking the leave or ignorance of its consequences are unlikely to be substantiated.

It is advised to consult with a competent legal expert should you require any assistance with organising a legal relationship with a board member, setting up an appropriate annual leave scheme, or an dispute with an employee over the payment of compensation for annual leave.

by Katrīna Eimane, Associate, Latvia

Team

Related Experience

VILGERTS assisted Summus Capital OÜ with the issue of unsecured bonds in the amount of EUR 10 million, arranged by Signet bank.  Summus Capital OÜ, established in 2013, is an Estonian-based investment company which has diversified commercial real estate portfolio in the Baltics. The group possesses a portfolio of cashflow generating commercial real estate properties in the retail, office, logistics and medical segments. The VILGERTS team included managing partner, Gints Vilgerts and senior associate, Kristīne Mora.  Other lawyers involved, included Kaido Loor.

Sale of shopping mall “Riga Plaza” to Summus Capital OU and Ivar Vendelin by LSREF3 Latvia Investments S.à r.l. where Vilgerts acted for the buyers.

Assistance to BPM Capital with exit from financing of DEAC and Smiltenes piens with mezzanine loans.

Provision of legal assistance and representing property development company that focuses its operations in Riga in court proceedings and arbitration proceedings concerning non-performance of contractual obligations by a bank and liability thereof.