Vacation Forever? News from the German Federal Labor Court

On December 20, 2022, the German Federal Labor Court (Bundesarbeitsgericht, BAG) issued two important decisions on untaken paid leave with significant implications for all employers in Germany:

• First, the BAG ruled that paid annual leave entitlement is not subject to the statutory three-year limitation period if the employer does not effectively allow the employees to take their annual paid leave (BAG, 9 AZR 266/20—link to the press release in German), following a judgment by the European Court of Justice (CJEU) dated September 22, 2022, C-120/21—see Judgment of the Court (available in English).

• Secondly, the BAG also decided that the paid annual leave entitlement acquired before an employee becomes sick does not lapse after 15 months in cases where the employees are not permitted to take such paid leave (BAG, 9 AZR 245/19—link to the press release in German), following a judgment by the CJEU dated September 22, 2022, C-518/20, C-727/20—see Judgment of the Court (available in English).

With these two decisions, the BAG confirms and implements a previous judgment of the CJEU dated November 6, 2018, in which the CJEU ruled that employees’ mandatory claims to paid leave will not be subject to lapse if their employers did not explicitly ask the employees in good time to take paid leave during the calendar year, effectively enabling the employees to take paid leave before the end of such year. Since the statutory paid annual leave entitlement is based on an EU regulation, the BAG applies these principles to German statutory paid annual leave.

What should employers do?

1. Employers should ask their employees to take at least their statutory annual leave (20 days in the case of a 5-day work week) within a calendar year.

• The principles set by the courts only apply to statutory paid leave entitlements. Provided that the parties clearly differentiate between statutory and contractual additional paid leave (see 2., below), such additional paid leave entitlement still expires after each calendar year if not taken in time.

2. Employers should ensure that their employment contracts clearly differentiate between statutory vacation entitlements and additional, contractual vacation entitlement, if any, and clearly state in the employment contracts that the additional contractual vacation entitlement shall lapse if not taken within the calendar year.

• The judgments of the CJEU and the BAG do not apply to additional vacation entitlements not based on mandatory law, provided that the employment contracts clearly differentiate between mandatory and additional contractual entitlements.

3. Employers should further ensure that their employment contracts contain valid limitation periods of three months.

• After the termination of an employment relationship, vacation claims transform into compensation claims. Such compensation claims are subject to a contractual limitation period—and, consequently, could lapse if the employee does not demand compensation for all outstanding vacation days within the period stipulated in the contractual forfeiture clause.

4. Last but not least: Employers should ensure that employees receive annual notices (1) informing the employees about their vacation entitlements, (2) requesting that employees take their vacation within the calendar year, and (3) explicitly pointing out that untaken vacation will lapse if it is not taken.

• The notices should be provided to the employees at the beginning of each year and, ideally, with respect to the remaining entitlements to paid leave, after the summer holiday season (e.g., in early September).