Vacation entitlements

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In most cases, vacation can be taken during the notice period, or offset against a garden leave period. However, this is not possible if employees are ill during this time. Employees who are unfit for work cannot validly take vacation, either. Instead, the outstanding vacation entitlements need to be paid out upon termination.

Additional difficulties can arise if employees have been ill for a long time. In these cases, employers might have to pay out the equivalent of multiple years of vacation entitlements, unless they can validly argue that such entitlements have lapsed. Both the European Court of Justice (ECJ) and the German Federal Employment Court (BAG) have recently dealt with the question of whether and when vacation entitlements lapse in theses cases, and neither court has made it easier for employers.

The German statutory regulation and the European and German courts’ interpretation in cases of long-term illness

Under German law, vacation needs to be taken in the respective calendar year. It can only be carried over to the next calendar year if this is justified by urgent operational reasons or reasons relating to the respective employee. In this case, it must be taken in the first three months. Otherwise, the entitlement will lapse.

• Example 1: An employee only takes ten out of 20 vacation days in 2018, and neither are they ill, nor are there urgent business needs that would prevent them from taking the remaining ten vacation days.
• Consequence: The remaining ten vacation days for 2018 lapse on 31 December 2018.
• Example 2: An employee only takes ten out of 20 vacation days in 2018. They become ill at the end of ­November 2018, and only return to work in January 2019.
• Consequence: The remaining ten vacation days for 2018 are carried over into 2019 and lapse on 31 March 2019.

In 2009, the ECJ found this regime to violate mandatory European law insofar as it concerned long-term ill employees. It held that national law could not provide for a lapse of vacation entitlements at all if an employee could not take vacation due to having been ill. In 2011, the ECJ then accepted a national regulation based on which vacation entitlements of long-term ill employees lapse after a fifteen month carry-over period.

The BAG implemented these ECJ decisions into national law and developed its own time-limit regime in 2012. It found that, in case of continued illness, vacation entitlements lapse after a carry-over period of 15 months after the end of the respective vacation year.

• Example 3: An employee only takes ten out of 20 vacation days in 2018. They become ill at the end of ­November 2018 and remain ill until January 2022.
• Consequence: The remaining ten vacation days for 2018 do not lapse on 31 March 2019 nor on 31 December 2019, but only on 31 March 2020.

Employers’ information and cooperation obligation

In 2018 and 2019, the ECJ and the BAG further strengthened employees’ rights by imposing an information and cooperation obligation on employers.

In November 2018, the ECJ found that a forfeiture of vacation entitlements merely based on a lack of application for vacation on the part of the employee was not compatible with EU law. Instead, employees could only lose their vacation entitlement – and thus their claim to financial compensation for unused vacation at the end of an employment relationship – if the employer had enabled them to take their vacation in due time. Thus, a claim to vacation can only lapse if the employee voluntarily renounces it in full knowledge of the consequences. The ECJ’s decision was confirmed by the BAG in 2019.

As a consequence of these decisions, vacation entitlements now only lapse if employers have informed their employees in writing or via email about their individual outstanding vacation entitlement, have requested that the employees take their outstanding vacation within the respective period, and have enabled the employees to actually do so.

• Example 4: An employee only takes ten out of 20 vacation days in 2018, and neither are they ill, nor are there urgent business needs that would prevent them from taking the remaining ten vacation days. The employer does not fulfil its information and cooperation obligation during the 2018 calendar year.
• Consequence: The remaining ten vacation days for 2018 do not lapse in 2018, or 2019, or even 2020 (unless the employer fulfils its information and co-operation obligations also for previous years at a later point in time).

Information obligation and long-term illness

Questions now arose about the consequences of employers neglecting the information obligation during a period in which an employee is or becomes ill.

The BAG confirmed in 2021 that the employers’ information obligations continued to apply during the employee’s illness, and that correct information was therefore a requirement for a forfeiture after 15 months. However, it also found vacation entitlements could lapse after 15 months if it was not possible for the employees to take their vacation solely because they had been continuously ill, even if the employer did not fulfil its obligations. In this case, it was not the employer’s failure to inform, but rather the illness that caused the employees’ inability to realize the holiday entitlement.

• Example 5: An employee only takes ten out of 20 vacation days in 2018. They become ill at the end of ­November 2018, and only return to work in January 2022. The employer fulfils its information and cooperation obligation during the 2018 calendar year, but not during the 2019 calendar year.
• Consequence: The remaining ten vacation days for 2018 lapse on 31 March 2020. The vacation entitlements for 2019 lapse on 31 March 2021.
  
• Example 6: An employee only takes ten out of 20 vacation days in 2018. They become ill at the end of ­November 2018, and only return to work in January 2022. The employer does not fulfil its information and cooperation obligation during the 2018 or 2019 calendar years.
  
• Consequence: The remaining ten vacation days for 2018 do not lapse on 31 December 2018, nor on 31 March 2019 or even 31 March 2020, but can still be taken in 2022. The vacation entitlements for 2019 lapse on 31 March 2021.
  

In 2022, both the ECJ and subsequently the BAG dealt with the consequences of an employee becoming ill during the calendar year, where the employer has not yet fulfilled its information obligation before the employee becomes ill. According to the courts, in these cases, vacation entitlements of long-term ill employees do not lapse fifteen months after the end of the respective vacation.

• Example 7: An employee does not take any vacation days in 2018. They become ill at the end of January 2018, and only return to work in January 2022. The employer fulfils its information and cooperation obligation in April 2018.
• Consequence: The vacation entitlements for 2018 do not lapse on 31 December 2018, nor on 31 March 2019 or even 31 March 2020, but can still be taken in 2022.

Hence, informing the employees about their entitlements when it is too late can have the same effect as not informing them at all.

Finally, in 2023, the BAG slightly improved the employers’ position. In the case at hand, an employee had become ill in early January. The court found that the illness had begun so early in the calendar year that the employer had not yet been obliged to fulfil its information and cooperation obligations. These obligations needed to be fulfilled without undue delay after the beginning of the respective calendar year, which typically meant by or before the sixth working day of the year. In addition, the court found that any vacation day entitlements exceeding the number of working days between this point in time and the commencement of the illness were again subject to the fifteen-month lapse rule, irrespective of whether the employer fulfilled its obligations.

• Example 8: An employee only takes ten out of 30 vacation days in 2018. They become ill on 1 February 2018, and only return to work in January 2022. The employer fulfils its information and cooperation obligation on 31 March 2018.
• Consequence: As January 2018 has 22 working days, only twelve additional vacation days could have been taken before the employee became ill. These twelve days for 2018 do not lapse, but can still be taken in 2022. The remaining eight days lapse on 31 March 2020.
• Example 9: An employee only takes ten out of 30 vacation days in 2018. They become ill on 1 February 2018, and only return to work in January 2022. The employer fulfils its information and cooperation obligation on 5 January 2018.
• Consequence: The remaining twenty vacation days for 2018 lapse on 31 March 2020.

Conclusion

Long-term illnesses of employees are, naturally, difficult to predict and plan. Employers who do not wish to be confronted with high compensation claims in case of a termination are therefore advised to take the necessary steps to prevent an accumulation of vacation entitlements over multiple years.

A proper information procedure should be established by which employers can ensure that they fulfil their obligations in due time. Most importantly, the information should be provided as early as possible in the calendar year, ideally within the first six working days.

In addition, the consequences of the decisions described above are mandatory concerning the statutory minimum vacation of 20 days per calendar year (based on a working week of five days). Additional contractual vacation days are only subject to these principles if no deviating regulations have been provided for in the employment contract. Hence, it might be worth reviewing the contractual regulations in current employment contract templates, while also considering amendments for new hires.

 

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