Court Ruling on German Vacation Entitlements Affects All EU Employers

Like many countries, Germany sets certain limits on when employees can take their accrued vacation. However, the European Court of Justice (ECJ) has found that Germany’s automatic expiry of holiday entitlement is inconsistent with EU law. The new case law has far-reaching effects for employers operating in any EU country.

Germany’s Current Law

The German Federal Vacation Act (Bundesurlaubsgesetz, or BUrlG) stipulates that vacation time must be approved by the employer and taken by the employee within a given calendar year.

Traditionally, case law has provided that any untaken vacation is forfeited at the end of the reference year, unless there were legally valid reasons for a transfer to the next year. If this transferred leave was not taken in the subsequent first three calendar months (i.e., by March 31 of the following year), then the leave would expire without any obligation on the part of the employer.

Changes Ahead

The new ruling from the ECJ has found the current application of the BUrlG to be unlawful.

In its November 6, 2018 judgment related to Max-Planck-Gesellschaft zur Förderung der Wissenschaften e.V. v. Tetsuji Shimizu (C-684/16), the ECJ held that a worker cannot automatically lose the right to take paid holiday because they did not apply to take it.

Mr. Shimizu was invited by his employer to take his accrued holiday entitlement before his employment came to an end. He took only two days and sought to be paid in lieu of 51 days accrued over two holiday years.

Germany’s Federal Labour Court held that the vacation claimed had been forfeited by the employee since the vacation had not been taken within the vacation (i.e., the calendar) year. To avoid any doubt, however, the Labour Court referred the case to the ECJ.

In its November ruling, the ECJ held that the automatic forfeiture of vacation compensation entitlements without prior notification to the employee went against EU law. While the employer is not obliged to require the employee to take vacation, it is obliged to explicitly and transparently ensure that the employee is in a position to take any paid annual leave by requesting that they do so and warning the employee that any untaken leave will be forfeited.

The onus is therefore on the employer to encourage the employee to apply for the vacation to which they are entitled. In the event of a dispute, the employer also bears the burden of proving that they have taken these steps.

ECJ Principles and Action Points

It’s important to emphasize that the ECJ’s ruling affects not only employers operating in Germany but in all other EU member states. There are certainly legislative differences between EU member states; for example, UK rules require employers to make a payment in lieu of statutory leave accrued but not taken on the termination of employment. That said, EU member state national courts are required to interpret domestic legislation as far as possible in compliance with the Article 7 of the Working Time Directive (WTD). Article 7states:

(1) Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice.

(2) The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated.

In the wake of the ruling related to the German vacation case, the ECJ set out a number of principles on the right to take paid annual leave under the WTD. Here are some critical points from the ECJ’s principles that employers should keep in mind:

• The worker is the weaker party. It cannot be left up to a worker to have sole responsibility to ensure they exercise their rights.
• While the WTD permits holiday leave to be lost at the end of a holiday year, it does not permit an automatic loss of rights without first verifying that the worker had an opportunity to take the annual leave available to them.
• The burden is on the employer to be able to demonstrate that it encouraged the worker to take annual leave (although this does not extend to forcing a worker to take holiday).
• An employer is required to ensure — in good time — that the worker is encouraged to take annual leave, and that they have the opportunity to do so. The worker must also be told the consequences of not taking holiday leave, i.e., that it will be lost. This encouragement must be done in a way that is “specific” and “transparent.”
• If the employer can show that the worker deliberately, in full knowledge of the consequences, refrained from taking annual leave after having had the opportunity to do so, the WTD does not preclude the loss of holiday or a payment in lieu of holiday on termination.

Apart from the critical point of ensuring that workers are encouraged to take leave (and given the opportunity to do so), EU employers should recognize the importance of good recordkeeping in the vacation-management process. Because the burden of proof lies with the employer, all related communications should be in writing (e.g., by mail, email, fax, SMS, etc.) and kept on file so that employers can fulfill their burden-of-proof obligation should an employee dispute arise.

More generally, the ECJ ruling is a useful reminder to employers about the importance of proactively managing workers’ annual leave in accordance with local laws, both to reduce risk and to promote employee engagement.

Bethan Arora, Senior HR Consultant, contributed to this article.