Client Legal Update: Judgment of the Federal Labor Court (BAG)

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See below this judgment from 20 December 2022 on the merits and limitations of annual vacation entitlements.

Summary

  • On 20 December 2022, the German Federal Labor Court (“BAG”) ruled that the entitlement to statutory minimum vacation is only subject to the three-year year statute of limitations if the employer has (i) previously informed its employees about their specific vacation entitlements and that the vacation will lapse if they do not take it and (ii) the employee then freely decides not to take them (See judgment – 9 AZR 266/20).
  • If the employer fails to do so, the corresponding vacation claims of the employees from earlier years can still be asserted.
  • The employer cannot rely on the regular three-year statute of limitation period (Sections 195, 199 German Civil Code (“BGB)”) as the statute of limitation period only begins at the end of the calendar year in which the employer is properly informed the employees.
  • With guidance by the European Court of Justice (“ECJ”), the BAG is thus continuously implementing an employee-friendly interpretation of the national vacation law.
  • Employers must pay attention to explicitly pointing out existing vacation entitlements of employees in a timely manner and to remind employees of their expiration in a documented way.
  • Otherwise, there is a risk that employees will accumulate endless vacation days over the year, which must be either granted or paid out at the end of the employment.
  • So far only the BAG press release of the judgment is available but as you can see it already contains very significant statements

Background of the decision

  • According to German law the annual vacation must in principle be taken in the current calendar year (Section 7 (3) German Federal Holiday Act (BUrlG)) – otherwise it is forfeited. From this rule there are 3 main exceptions:
    • Exception 1: the vacation does not lapse if the employee is sick throughout the whole calendar year. Then the vacation lapses after 15 months.
    • Exception 2: An automatic carryover of vacation until 31 March of the following year takes place if there are urgent compelling operational reasons or personal reasons that prevented an employee from taking the vacation
    • Exception 3: the employer did not timely inform the employee about the lapse on 31 December, did not ask them to take the vacation and did not make sure the employee could actually take the vacation
  • The right to paid annual vacation is further guaranteed in Art. 31 (2) of the Charter of Fundamental Rights. Additional regulations can also be found in Art. 7 of the Working Time Directive RL 2003/88/EC and numerous decisions on its interpretation by the ECJ. Questions of vacation law are therefore not to be judged solely according to national law.
  • In 2018, the ECJ ruled that annual leave entitlements can only be forfeited if the employee is “actually put in a position by his or her employer to also exercise the leave entitlement by providing the appropriate information” (judgment of 6 November 2018 – C- 684/16).
  • The BAG followed up on this decision and established a strict information and clarification obligation (duty to cooperate) of the employer: Only if the employer has pointed out the existence and expiry date of vacation entitlements and the employee has nevertheless not taken leave of his or her her own free will, shall it be forfeited (judgment of 19 February 2019 – 9 AZR 423/16).
  • The question of how this case law relates to the statute of limitations was unresolved until now.
  • In principle, the regular limitation period is three years and begins – irrespective of knowledge of the claim – at the end of the calendar year in which it arose (Sections 195, 199 (1) BGB.
  • According to the new BAG decision, however, Section 199 (1) BGB is to be interpreted in accordance with the European directive.
  • Therefore, the regular limitation period of three years does not necessarily begin at the end of the vacation year, but only at the end of the year in which the employer fulfills its information and cooperation duties.

Practical implications

  • The decision is of fundamental importance for practice and emphasizes – once again – the significance of the employer’s obligations in regards to the granting of annual vacation.
  • Strict attention must be paid to informing employees in good time about existing vacation entitlements and their expiry, ie during the current calendar year or – if applicable – in the respective transition period (31st March of the following calendar year).
  • This applies in principle to statutory minimum leave as well as contractual additional leave, unless otherwise agreed on beforehand.
  • The employer must have actually made it possible for the employee to take the vacation. Thus, the employer must not have rejected the employee’s leave request for operational reasons.
  • Notification must be provided in a verifiable form and on an individual basis each calendar year. Blanket notifications or blanket agreements in the employment contract are not sufficient to fulfill the duty to cooperate.
  • It must also be checked whether vacation entitlements from the past calendar years have not expired due to non-fulfillment of the duty to cooperate, which must then be included in the notification. The employer may not invoke the fact that old vacation entitlements from periods prior to this case law have been forfeited.
  • The previous judicature according to which vacation entitlements expire automatically 15 months after the end of the calendar year in the event of uninterrupted incapacity for work because of sickness does not apply if (any) work was actually performed (at least in part) and the employer did not fulfill its duty to cooperate.
  • In consequence, vacation entitlements can accumulate if the duty to cooperate is not fulfilled. Meaning, if the employer fails to comply with these obligations, this can have significant costly consequences for the employer.
  • Although, the BAG has not expressed any opinion on this matter, a claim to compensation for unused vacation that has arisen as a result of the termination of the employment relationship is – as a purely monetary claim – likely to remain subject to the regular statute of limitations and/or exclusion periods.

To do’s for employers

  • The decision is of fundamental importance for practice and emphasizes – once again – the significance of the employer’s obligations in regards to the granting of annual vacation.
  • Strict attention must be paid to informing employees in good time about existing vacation entitlements and their expiry, ie during the current calendar year or – if applicable – in the respective transition period (31st March of the following calendar year).
  • This applies in principle to statutory minimum leave as well as contractual additional leave, unless otherwise agreed on beforehand.
  • The employer must have actually made it possible for the employee to take the vacation. Thus, the employer must not have rejected the employee’s leave request for operational reasons.
  • Notification must be provided in a verifiable form and on an individual basis each calendar year. Blanket notifications or blanket agreements in the employment contract are not sufficient to fulfill the duty to cooperate.
  • It must also be checked whether vacation entitlements from the past calendar years have not expired due to non-fulfillment of the duty to cooperate, which must then be included in the notification. The employer may not invoke the fact that old vacation entitlements from periods prior to this case law have been forfeited.
  • The previous judicature according to which vacation entitlements expire automatically 15 months after the end of the calendar year in the event of uninterrupted incapacity for work because of sickness does not apply if (any) work was actually performed (at least in part) and the employer did not fulfill its duty to cooperate.
  • In consequence, vacation entitlements can accumulate if the duty to cooperate is not fulfilled. Meaning, if the employer fails to comply with these obligations, this can have significant costly consequences for the employer.
  • Although, the BAG has not expressed any opinion on this matter, a claim to compensation for unused vacation that has arisen as a result of the termination of the employment relationship is – as a purely monetary claim – likely to remain subject to the regular statute of limitations and/or exclusion periods.
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