This article explores recent decisions by the European Court of Justice (ECJ) and German Federal Labour Court that challenge the previous principles of forfeiture of vacation entitlements for employees in Germany. Although the law remains unsettled on this issue, these decisions suggest that unused statutory minimum vacation leave expires later than provided for in the German Federal Leave Act (the Act), if such expiration is caused by an employee’s illness.

2009: The ECJ’s Decision in Schultz-Hoff Sets Forth Minimum Annual Vacation Leave

Previously, under the Act, unused vacation leave for a given year expired at the end of that year unless urgent operational reasons or personal reasons of the employee (e.g., illness) required a carryover into the following year, in which case unused vacation leave would lapse no later than March 31 of that following year. However, in Schultz-Hoff,1 a January 2009 decision, the ECJ determined that if employees are unable to work during the entire calendar year due to an illness, then such employees are entitled to a statutory minimum paid annual vacation leave with respect to such year. The ECJ reached this determination, in part, because the principal purpose of the vacation leave — relaxation — could not be achieved during an illness.

The statutory minimum annual vacation leave amounts are 20 days in the case of a five-day workweek and 24 days in the case of a six-day workweek. Nonetheless, it is common in Germany to grant 30 days of annual vacation leave to an employee who works five days per week.

2011: The ECJ’s Decision in Schulte Limited Schultz-Hoff

After the Schultz-Hoff decision, it appeared that the minimum annual vacation leave not taken due to illness would never expire. In November 2011, the ECJ limited the reach of Schultz-Hoff in its Schulte2 ruling. In Schulte, the ECJ determined that expiration of the minimum annual vacation leave is generally possible and necessary because an employer may otherwise face untenable economic consequences (such as an employee’s accumulation of unlimited vacation entitlements, particularly in the case of long-term work incapacity). Consequently, Schulte determined that statutory minimum leave entitlements may expire based on national laws and practices, such as collective bargaining agreements, even if the vacation cannot be taken due to illness. The carryover period, after which the entitlement to paid leave expires, must amount to at least 15 months.

Certain Rulings by the BAG Suggest Support of the ECJ’s Decision in Schulte

Although the consequences of Schulte are not entirely clear, the German Federal Labour Court (the Bundesarbeitsgericht or BAG) has issued rulings that arguably support the ECJ’s decision in Schulte in two contexts: employment contracts and terminations of employment in the context of collectively bargained agreements.

Employment Contracts. The BAG addressed the Schultz-Hoff ruling with a May 2010 decision3 that supported the ECJ’s ruling in Schulte. Accordingly, the BAG ruled that a leave entitlement that exceeds the statutory minimum entitlement may expire if the applicable employment contract satisfies certain requirements. In particular, the explicit definition of days, which exceed the statutory minimum annual vacation leave for a given year, is required in the employment contract, so that in any case and according to the Act, the additional leave expires by March 31 of the following year.

Terminations of Employment & Collective Bargaining. Currently, the principle that minimum annual vacation leave is not subject to expiration does not apply to payments in lieu of vacation entitlements in the event of the termination of the employment relationship. In this regard, the BAG stated in its August 2011 decision that a mere monetary claim, such as a payment in lieu of vacation entitlement, may be subject to exclusion and/or expiration periods in accordance with collectively bargained agreements.

Conclusion

The German legislature did not act to adopt the statutory expiration deadline of March 31 with respect to vacation not taken due to illness. The BAG just ruled that the Act can be construed in such a way that it provides for expiration of minimum annual vacation leave after a carryover period of at least 15 months.5 Employers should therefore be aware that a forfeiture can be expected after 15 months at the earliest. In any event, employment contracts should explicitly distinguish between the statutory minimum leave entitlement and additional leave, so that at least the additional leave expires on March 31 of the following year. In light of the evolving legal landscape, German employers should partner with their attorneys in order to stay abreast of developments on this issue by courts, legislators and the parties to the collective bargaining agreements.