By Henrik Lüthge and Dr. Franziska von Kummer, LL.M., M.C.L.
On November 29, 2017, the European Court of Justice (ECJ) decided with regard to a request for a preliminary ruling by the Court of Appeal (England & Wales) that the right to paid leave has to be carried over and is accumulated, if required, until termination of the employment relationship if such right has not been exercised due to the employer’s refusal to compensate such leave periods. This shall also apply if national vacation leave laws provide otherwise, i.e., for a lapse of vacation leave claims after a certain period of time (cf. King / The Sash Window Workshop Ltd. et al. [C-214/16]).
This judgment will also have far-reaching implications for German vacation leave law. The risks for employers to be obliged to comply with leave entitlements accumulated over years will be substantially increased. Notably, this applies to self-employed staff such as freelancers and independent contractors, who subsequently turn out to be false self-employed (Scheinselbstständigkeit).
The ECJ case: 24 weeks of leave accumulated over 13 years
A (false) self-employed party, Mr. King, had been working for The Sash Window Workshop Ltd. (“SWW”) since 1999 for an overall period of 13 years based on a self-employed, commission-only contract. Mr. King refused to sign an employment contract – an offer that had been made to him by SWW in the meantime. As a freelancer, Mr. King had no contractual right to paid leave and so did not take any such leave, only interrupting his work for SWW for a few days each year.
When SWW terminated their contract with Mr. King, he sought to recover payment for annual leave – taken and not paid as well as not taken – for the entire period of his 13-year engagement. He took the view that he had been a worker and would have been entitled to paid leave according to national vacation leave law (which implements Directive 2003/88/EC).
The English courts ruled that Mr. King qualified as a worker (false self-employment). Right until the very end, however, it was disputed whether SWW had to compensate the leave which – pursuant to national law – would have been forfeited (similar to section 7 (3) Bundesurlaubsgesetz [German Federal Vacation Law]). The entire leave amounted to more than 24 weeks.
Mr. King argued that the forfeiture rules would not apply in his case. He had not taken his leave solely because SWW would not have compensated such leave. In this respect he referred to the 2009 Schultz-Hoff judgment, in which the ECJ, referring to Directive 2003/88/EC,
decided that national forfeiture rules would violate European law if they provided for the forfeiture and lapse of claims for leave if the employee could not take such leave due to illness (ECJ judgment of January 20, 2009 – C-350/06 inter alia). Finally, the Court of Appeal referred the case to the ECJ and asked to what extent English vacation leave rules in the present case are compatible with European law.
ECJ: No forfeiture of leave, not even after 15 months
The judgment is crucial: The ECJ decided that the employer cannot refer to statutory forfeiture rules if the employee did not take leave because the employer refused to grant paid leave. Furthermore, and this is particularly problematic for employers, leave should not lapse and be forfeited after 15 months, as the ECJ ruled more precisely subsequently in the Schulte case where leave was not taken due to illness (ECJ judgment of November 22, 2011 – C-214/10).
The ECJ justifies this decision by arguing that the right to paid annual leave must be regarded as a particularly important principle of EU social law. A worker faced with circumstances which give rise to uncertainty during the leave period as to the remuneration owed would not be able to fully benefit from that leave as a period of relaxation and leisure. A worker who has to worry about not receiving remuneration during leave could also be deterred from taking leave. The right to leave would also not lapse after a period of 15 months. Such an interpretation would result in an unlawful enrichment of the employer and would be inconsistent with the purpose of the Directive to protect the employee’s health.
Section 7 paragraph 3 of the German Federal Vacation Law no longer reliable
The judgment will have a huge impact on German vacation leave law, above all with regard to the interpretation of Section 7 paragraph 3 Bundesurlaubsgesetz which – according to its wording – provides for forfeiture and lapse of leave entitlement as of March 31 of the following year at the latest. There is no relying on the statutory forfeiture of annual leave, not only if leave has not been taken due to illness but now also in the case of an employer’s refusal to remunerate such leave. Thus, extensive leave entitlements can be accumulated. The decisive question will now be if an employer refuses to remunerate leave within the aforesaid meaning, whether these requirements would have been met if the employer fails to encourage the employee to actually take leave.
When drafting leave provisions for employment agreements, this is one more reason to differentiate between compulsory minimum leave and leave that exceeds the statutory entitlement. The ECJ judgment only relates to the minimum annual leave provided for in Directive 2003/88/EC (four weeks) so that any leave granted additionally may be governed by individual rules concerning forfeiture and lapse of leave, etc.
Third-party staff: Strict compliance is a must
As far as freelancers and other self-employed third-party staff are concerned, such leave clauses are not helpful at all. Under German law, self-employed persons are not generally entitled to leave since such leave entitlement – this is the paradox – would indicate their status as an employed person and their dependence. Therefore, a strict compliance process is still required when engaging third-party staff. Not only large but also small enterprises should specify and implement clear rules concerning third-party staff. Without such rules, the engagement of third-party staff is hardly justifiable nowadays and the present ECJ ruling proves this once again.