Looking to Luxembourg and the ECJ

Vacation rights in Germany and Europe and the risks for employers

By Dr. Bernd Borgmann and Tom Stiebert

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The legal frame

From the point of view of the employee, vacations are usually a nice thing. Even from the point of view of a reasonable employer, there are no concerns about granting leave to workers as they gen­e­r­ally return to work more relaxed and often more motivated.

From a legal point of view, it is also quite simple: The employee takes annual leave and is paid in full during that time.  Vacation entitlement cannot be bought or transferred to subsequent years.

German law confirms this: Payment continues while the employee is on vacation (section 11 Federal Vacation Act [Bundesurlaubsgesetz, BUrlG]). In addition, the vacation must be taken during the current year (section 7 (3) BUrlG). A transfer to subsequent years is generally inadmissible (section 7 (3) BUrlG). Only in special cases can it be transferred to the following year and must then be taken within three months. However, employment contracts or collective agreements often provide for the possibility of a longer transfer period into the following year. If the leave is not taken, compensation should only be granted if the employment contract ends (section 7 (4) BUrlG).

However, more aspects came into play through EU law. Directive 2003/88/EC of the European Parliament and of the Council of November 4, 2003 concerning certain aspects of the organization of working time states in Article 7: (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.

The problem of transferring the leave entitlement to subsequent years, however, is not explicitly dealt with. Here, therefore, national law still seems to be relevant.

The important judgments of the ECJ

Nevertheless, for many, surprisingly, the right to vacation has become a focus of EU law in the last 10 years, which has meant that German jurisprudence has had to be modified accordingly.

It all started with the judgment in the Schultz-Hoff case in 2009 (docket number C-350/06). The ECJ emphasized here: “Article 7(2) of Directive 2003/88 must be interpreted as precluding national legislation or practices which provide that, on termination of the employment relationship, no allowance in lieu of paid annual leave not taken is to be paid to a worker who has been on sick leave for the whole or part of the leave year and/or of a carry-over period, which was the reason why he could not exercise his right to paid annual leave”. The excitement was great and many suspected that this should mean that an unlimited accumulation of leave would be possible, which may also lead to unlimited compensation. Shortly thereafter, the ECJ was forced to modify its decision, stressing: “Article 7(1) of Directive 2003/88/EC of the European Parliament and of the Council of 4 November 2003 concerning certain aspects of the organisation of working time must be interpreted as not precluding national provisions or practices, such as collective agreements, which limit, by a carry-over period of 15 months on the expiry of which the right to paid annual leave lapses, the accumulation of entitlement to such leave of a worker who is unfit for work for several consecutive reference periods”. (judgement from November 22, 2011, KHS, docket number C-214/10)

German law then had to react to this and interpret § 7 (3) BUrlG in accordance with European law.

The following principles then applied:

  • If an employee has not taken up leave although able to do so, the leave will be canceled by the end of the year.
  • If it was not possible to take leave, especially due to illness, the leave can be transferred for another 15 months.
  • This should also apply to the allowance in lieu – the remaining leave is thus to be paid; if the leave entitlement is lost, there is no claim for compensation.
  • Limitation regulations do not apply here either since the claim for allowance in lieu arises only at the end of the employment relationship.
  • Exclusion periods can indeed be fixed in principle, but these also do not begin until the employment relationship ends.

Thus, according to case law, there is a risk for the employer in special cases but this is limited financially by the time limit imposed by the ECJ.

Turnaround by ECJ judgment of November 29, 2017

Surprisingly, the ECJ seems to see it differently in a recent decision published on November 29, 2017 (docket number C-214/16). A bogus self-employed person – an employee who worked on the basis of a self-employed, commission-only contract not being entitled to the claims of a salaried employee (such as vacation) – had sued for compensation of the vacation not granted to him from 1999 to 2012. The ECJ would have been expected to limit the compensation but this did not happen.

The ECJ emphasized: “Article 7 of Directive 2003/88 must be interpreted as preclu­ding national provisions or practices that prevent a worker from carrying over and, where appropriate, accumulating, until termination of his employment relationship, paid annual leave rights not exercised in respect of several consecutive reference periods because his employer refused to remunerate that leave.”

There was no time limit here, with the result that the employer has to financially compensate a vacation entitlement of 13 years (i.e., at least 13 x 20 = 260 days), which is a significant cost. The ECJ did not rule on whether, had the employment relationship continued, it would have been possible to claim the leave for 260 days as well. At first glance, however, this judgment seems to be a negative departure from previous case law – at least from the perspective of an employer.

However – and this is also clear – the judgment seeks in most cases to maintain case law and limit the accumulation of vacation entitlement and allowance in lieu. In particular, the judgment expressly recognizes that employers should be protected against excessive financial burden (recital 55) if they need this protection. This view is completely correct.

In this specific case, however, the ECJ acknowledges that “protection of the employer’s interests does not seem strictly necessary” (recital 59). The nongranting of leave is based on a violation by the employer, who has also benefited from this. For this particular reason alone there is no time limit.

The court thus recognizes that vacations have a financial dimension that must always be preserved for the employee. The interests of the employer, however, can lead to this claim being cut. Surprisingly, the ECJ no longer refers to the recreational function of the vacation in its argumentation, but turns it into a purely financial consideration.

Consequences in practice

It is always important to check the rights to which an employee is entitled. This includes strictly distinguishing between employees and the self-employed. An error does not release the employer from his or her duties, as the ECJ expressly points out. This cannot be restricted by contractual arrangements; these would, as the ECJ makes clear, be ineffective. Exclusion periods would also only begin at the end of the employment relationship and no earlier.

For this reason, in order to avoid risks, it must always be carefully checked whether a jobholder is an employee. Creative constructions for bypassing are strongly discouraged. Employers should always be advised to ensure that employees use their vacation within one year. This minimizes the risks of – possibly unlimited – compensation when leaving employment. Employing a bogus self-employed person is therefore now even riskier than before. Vacation rights continue to be a topic where fundamental changes are always possible. Knowledge of German law alone is no longer sufficient here; Luxembourg sets the course.

bernd.borgmann@dlapiper.com

tom.stiebert@dlapiper.com