On November 22 2011 the European Court of Justice (ECJ) decided that the EU Working Time Directive (93/104/EC) does not preclude a collective bargaining provision under which claims of sick employees, who are unable to work for long periods of time, to paid annual leave are extinguished after a 15-month transitional period. Thus, the ECJ is putting its previous 2009 case law into perspective and has specified important practice requirements which are examined in this update.
The ECJ's January 20 2009 Schultz-Hoff decision made fundamental changes to German law regarding entitlement to leave and presented human resources departments with some challenges.
At the time, the ECJ decided that an employee's entitlement to paid leave may not be extinguished after a transitional period, as stipulated in national law, if the employee was unable to take leave either during the reference period or during the transitional period owing to an inability to work. This would therefore mean that a sick employee's entitlement to leave may not lapse before he or she recovers.
Previously, based on the Federal Leave Act, the unanimous assumption in Germany had been that entitlement to leave lapses at the latest on March 31 of the following year, whether or not the employee is sick. However, following the Schultz-Hoff decision, the Federal Labour Court assumed that the time limits provided under German law, in which leave entitlement can be claimed, are not applicable in the case of inability to work owing to illness.(1)
The serious implications of this volte face quickly become obvious. It is not uncommon, in practice, for employees to be sick and unable to work for a period of several years. Under German law, the statutory minimum entitlement to leave is four weeks per year. However, six weeks' paid annual leave is often agreed under collective bargaining agreements or in employment contracts. For example, if an employee is unable to work owing to illness for a period of four years, this employee would then be entitled to 120 days' paid leave when he or she recovered. Compensation would also have to be taken into account if the employment relationship were to end.
In the recent KHS-Schulte November 22 2011 decision, the ECJ took the opportunity to further define its wide-reaching verdict in Schultz-Hoff, thus providing more clarity for parties applying the law. The following facts formed the basis of the preliminary ruling proceedings.
The claimant was employed as a mechanic by the defendant from 1964 until August 31 2008. The applicable collective bargaining agreement provided that leave which could not be taken owing to illness would lapse after a 15-month transitional period. From 2002 until the end of the employment relationship in 2008, the claimant was sick and unable to work. In his claim filed in March 2009, the claimant demanded compensation in lieu of holiday for 2006, 2007 and 2008. The employment court granted his claim and awarded him a total of 75 days' paid leave for 2006 to 2008, which were not supposed to lapse.
At second instance, the Hamm Labour Court of Appeal held that the collective bargaining deadline of 15 months meant that there was no entitlement to paid leave for 2006. However, the appeal court doubted the compatibility of the 15-month transitional period with EU law and initiated corresponding preliminary ruling proceedings before the ECJ.
The ECJ confirmed the admissibility of the collective bargaining provision of a 15-month transitional period. At the same time, it again emphasised the high priority, in terms of EU social law, of entitlement to paid annual leave. National transitional periods for leave after which the leave entitlement lapses are therefore lawful as a matter of principle only in cases where the employee had the opportunity to take the minimum leave provided under the EU Working Time Directive (cf Schultz-Hoff) during the transitional period. The ECJ is now modifying this principle, in view of the fact that it would otherwise be possible for employees who were unable to work for a long period of time to accrue leave entitlement without any restriction over a period of many years. In view of the dual purpose of annual leave, this is not necessary either. Whereas the purpose of relaxation and leisure could continue to be achieved in the event of long-term sickness, the purpose of recuperation from work could not be achieved, owing to the fact that no work has been carried out. Once 15 months have passed since the end of the calendar year for which the leave entitlement has accrued, it can no longer be said that annual leave has a positive effect as a recuperative period.
In future, the parties to collective bargaining agreements in Germany will not be prevented from agreeing a forfeiture deadline for leave transferred as the result of an inability to work. However, the collective bargaining parties cannot be expected to make use of this option across the board. This is because the trade unions in general are not interested in agreeing forfeiture clauses which are to the detriment of employees who are members of trade unions. Therefore, the German legislature would need to make a change. However, in the past the legislature has repeatedly shown that it is reluctant to enshrine employment law principles which case law has established or specified into statute.
At the moment, what is clear is that a transitional period agreed in a collective bargaining agreement must exceed the 12-month threshold and, further, to be legally absolutely certain it should exceed the 15-month threshold. Apparently, it is not necessary to agree to an 18-month transitional period as stated in the International Labour Organisation's Holidays with Pay Convention.
However, the issue of whether a 15-month transitional period can also be agreed in individual employment contracts has not yet been clarified and is of particular interest in practice. The grounds stated in the KHS-Schulte decision would suggest that this is the case. This is because if the recuperative purpose of annual leave no longer applies after 15 months, then it makes no difference whether the 15-month transitional period is based on a collective bargaining agreement or an individual employment contract. However, it remains to be seen whether the labour courts will in future consider such forfeiture clauses agreed in individual contracts as admissible and legally valid. This issue has already been the subject of heated discussion in literature.
One last hope from the employer's point of view will be that, even in the absence of an agreed transitional period, the German courts base their decisions on the principles set out by the ECJ and interpret the German law provisions on leave accordingly. In fact, this is exactly what the Baden-Württemberg Labour Court of Appeal did in a recent decision, holding that for the reasons set out in KHS-Schulte, entitlements to annual leave will lapse after 15 months.(2) However, those applying the law should not rely on other courts to decide in the same way. Instead, they should take necessary precautions in employment contracts, even if the admissibility of transitional periods agreed in individual employment contracts has not yet been clarified.
For further information on this topic please contact Bjoern Gaul, Bernd Roock, Oliver Simon or Antje-Kathrin Uhl at CMS Hasche Sigle by telephone (+49 711 9764 248), fax (+49 711 9764 96249) or email ([email protected], [email protected], [email protected] or [email protected]).
(1) Federal Labour Court decision of March 24 2009 (9 AZR 983/07); Federal Labour Court decision of March 23 2010 (9 AZR 128/09).
(2) Baden-Württemberg Labour Court of Appeal decision of December 21 2011 (10 Sa 19/11).