Germany - Financial compensation for annual leave

I. Preliminary Rulings of ECJ

The European Court of Justice (ECJ) now renders preliminary rulings concerning compensation for annual leave under fewer conditions (EuGH C-569/16, C-570-16, C-619/16 and C-684/16). The first question raised by the German Federal Labour Court (BAG) concerns financial compensation for open annual leave in the event of the employee’s death: Does the entitlement of financial compensation for unused annual leave expire or does it pass to the heirs? The second question is about financial compensation for annual leave not taken before termination of employment: Is the right to financial compensation on termination of employment excluded if the employee has not applied for paid annual leave even though he was able to do so?  

There is not yet a final decision by the ECJ, but Advocate General Yves Bot clearly states in his opinions that the fundamental right of employees to annual leave as enshrined in Union law must not be interpreted restrictively. Therefore, the entitlement to financial compensation shall remain after the employee’s death and shall pass to the heirs. And secondly, an employee shall also be entitled to financial compensation after termination of the employment relationship, although he has not made any application for leave, unless the employer has evidence that the employee has actually been able to take his entitlement to annual leave.

We expect the ECJ to follow Advocate General Yves Bot’s approach. If so, employers will strongly be advised to take care that employees actually take vacation leave. Besides from that and already now employers should consider the following principles of German vacation law:

II. Principles of German vacation law

1. Accrual of holiday entitlement

Every employee is entitled to paid holiday each calendar year. The entitlement comes into force in its entirety and it not earned on a monthly basis. For new employees, the entitlement arises for the first time after a waiting period of six months from beginning of the employment relationship and is renewed at the beginning of each calendar year thereafter.

2. Transfer of leave to the new calendar year

At the end of the year, remaining vacation days are lost without compensation. However, a transfer of remaining vacation to the first three months of the following year is planned if  the employee was unable to take the leave during the year due to urgent operational or personal reasons, e.g. in the event of illness.

3. Compensation of holiday entitlement

Compensation for the holiday entitlement in the form of a right to remuneration for the employee's remaining holiday days is possible if the employment relationship is terminated (see above). The right to compensation is a substitute for the unrealised right to time off from the obligation to work. If, after expiry of the waiting period of six months, a full entitlement to leave has arisen and the employment relationship ends in the first half of the calendar year, the BUrlG orders the partial cessation of an entitlement that has already arisen. The employee experiences a reduction of his entitlement to "partial leave". If the employee has already received more leave than he is entitled to, the already-paid leave allowance cannot be reclaimed.

III. Résumé

With its deadline regime and the specified calculation system, the BUrlG sets out strict legal requirements for granting leave, which can only be deviated from in rare cases and only in favor of the employee. In addition, the opinions of the Advocate General suggest an interpretation beyond the wording of the BUrlG and draw on additional bases for employee’s claims under Union law. The ECJ is expected to follow this approach.

However, these guidelines only refer to the statutory minimum leave of 20 days in the calendar year for five working days a week.

If leave is granted beyond the statutory leave, the contractual regulations should be adjusted, as employer-friendly regulations can be agreed for extra-legal leave. For example, it can be formulated that the contractual additional holiday expires completely at the end of the holiday year, even if the condition for a transfer to the next year would be fulfilled.