Employees in Germany have an annual statutory entitlement to 20 days of paid vacation (for a five day working week). However, most employment contracts and collective bargaining agreements provide for an additional entitlement for employees; overall, an entitlement to 25 to 30 days of paid vacation per year is common practice in Germany. At least as far as the statutory entitlement is concerned, a payment in lieu of holiday is not permitted under German law; the employee actually has to physically take the vacation entitlement, unless he or she is unable to because the employment relationship has ended.

Under the German Federal Vacation Act, the statutory vacation entitlement must be taken during the current calendar year; otherwise, it is automatically forfeited. However, vacation not taken in the current year can be carried over until 31 March of the following calendar year if compelling operational reasons or personal reasons (such as sickness) make it impossible for the employee to take vacation during the current calendar year. By the end of 31 March of the following year, all entitlements to carried over vacation are automatically forfeited if the employee has failed to take the carried over vacation by then.

However, according to a judgment of the European Court of Justice in 2009 and several subsequent judgments of the German Federal Labour Court, the statutory vacation entitlement does not automatically forfeit by the end of 31 March of the following year in cases in which an employee is unable to take vacation during the relevant calendar year and the carry-over period, due to an incapacity for work caused by illness. As a result, where a long-term illness has made the employee incapable of working for several years, the employee can, after his or her recovery, claim for paid vacation or, if the employment relationship was terminated before the employee recovered, claim for payment in lieu of vacation which was accumulated over all years of incapacity for work.

In a judgment in November 2011, the European Court of Justice ruled that the right of an employee who is incapable of working for several years to receive payment in lieu of vacation may be limited to 15 months from the end of the period during which the vacation entitlement accrued. The European Court of Justice argued that a right to accumulate paid annual vacation while being incapable of working for a period of several years would no longer be compatible with the purposes of paid annual vacation (recuperation from work and time for relaxation). Furthermore, employers must be able to rely on protection against the possibility that accrued vacation will enable employees to remain absent for excessively long periods of time and also from the organisational difficulties this can entail. The Court considered that a carryover period of 15 months could represent a reasonable period that does not defeat the purpose of paid annual vacation since it ensures that the right to holiday leave retains its positive effect as a period of rest for the employee.

The German Federal Labour Court now interprets the relevant sections of the German Federal Vacation Act so as to conform with this European Court of Justice judgment and, for cases in which an employee was incapable of working for several years, applies a statutory forfeiture of vacation entitlements/payment in lieu after a period of 15 months from the end of a calendar year.