Germany: Federal Labour Court revises holiday rules

The German Federal Labour Court has revised its previous rulings on annual leave rights in the event of illness, following a 2009 judgment by the European Court of Justice (ECJ). In the future, employees on long-term sick leave will be entitled to take in full, or be paid for, any leave accrued during their illness.

On this page:
Cut-off date for statutory leave entitlement
The Schultz-Hoff case
The ECJ ruling
German rulings
Possible implications.

Cut-off date for statutory leave entitlement

Under the Federal Holiday Act (Bundesurlaubsgesetz), employees are entitled to four weeks (expressed as 24 working days) of paid annual leave per year. In practice, most employees are covered by collective agreements providing for six weeks of paid annual leave.

According to the Act, leave must be taken during the calendar year, and may be carried over into the subsequent year only for urgent operational reasons or if the employee has not been able to take leave because of personal circumstances, such as illness. In such a situation, leave may be taken up until 31 March the following year: failure to do so means that entitlement is forfeited. If an employee leaves employment before the cut-off date without being able to take the leave entitlement, the employer must make a payment in lieu. However, an employee on long-term sick leave loses any entitlement if they are still absent on 31 March. The Federal Labour Court (Bundesarbeitsgericht) has consistently upheld this approach and ruled that leave cannot accumulate from year to year.

The Schultz-Hoff case

Gerhard Schultz-Hoff was employed by the Federal German Pension Fund (Deutsche Rentenversicherung Bund). Schultz-Hoff has a serious disability and experienced alternating periods of fitness for work and incapacity for work due to illness for some years. In 2004, he was physically fit to work until the beginning of September. Thereafter, he was on continuous sick leave until 30 September 2005, when his employment was terminated.

In May 2005, Schultz-Hoff asked to take paid annual leave from 1 June 2005 in respect of the calendar year 2004. The employer refused this request on the ground that the competent medical service had first to establish whether he was fit to work. In September 2005, the employer found that Schultz-Hoff was incapacitated for work and granted him a permanent pension, backdated to 1 March 2005.

Schultz-Hoff brought a case before the Düsseldorf Labour Court (Arbeitsgericht), seeking payment of allowances totalling €14,000 in respect of paid annual leave not taken in the calendar years 2004 and 2005. The employer maintained that Schultz-Hoff's incapacity for work continued at the date of the Court hearing, and therefore beyond the cut-off date set by the Federal Holiday Act. As a result, according to German law, his right to paid annual leave had been extinguished and he was not entitled to any allowance in lieu of paid annual leave not taken.

The court dismissed Schultz-Hoff's action and he appealed to the Higher Labour Court (Landesarbeitsgericht) in Düsseldorf. The Higher Labour Court decided to refer to the ECJ the question of whether German law in this area is compatible with the EU Working Time Directive (2003/88/EC), which provides (in art.7.1) that all workers are 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. This minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated (art.7.2).

At the ECJ, the case (C-350/06, Schultz-Hoff v Deutsche Rentenversicherung Bund) was joined with a related case referred from the UK (C-520/06, Stringer and Others v Her Majesty's Revenue and Customs).

The ECJ ruling

The ECJ gave its judgment (on the ECJ website) on 20 January 2009. It found that, in the light of the Working Time Directive:

• a worker may be forbidden from taking paid annual leave during sick leave, but only as long as the worker has the opportunity of exercising the right to take paid annual leave at another time;
• the right to paid annual leave must not be extinguished at the end of the leave year and/or of a carry-over period laid down by national law, where the worker has been on sick leave for the whole or part of the leave year and where their incapacity to work has persisted until the end of their employment relationship, which was the reason why they could not exercise their right to paid annual leave;
• on termination of the employment relationship, an allowance in lieu of paid annual leave not taken must 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 they could not exercise their right to paid annual leave; and
• the allowance in lieu must be calculated on the basis of the worker's normal remuneration.

The ECJ stated that the entitlement of every worker to paid annual leave must be regarded as "a particularly important principle of Community social law from which there can be no derogations". The conditions for the exercise and implementation of the right to paid annual leave are governed by national legislation and/or practice, but these must be subject to the limits expressly laid down in the Directive. This would allow for the German provisions on taking leave during a calendar year, and a limited carry-over period. However, entitlement cannot be made dependent on whether a worker has actually worked during the holiday year.

On the question of the right to take annual leave if illness persists beyond the holiday year or carry-over period, the ECJ accepted the argument of the German Government that national legislation could, in principle, regulate a worker's right to take leave and provide for a cut-off date for entitlement, but noted that this "is subject to certain limits". In particular, any provision that denied a worker an opportunity to exercise the right to leave under the Directive would breach the established rulings of the Court (notably in the 2001 BECTU case, C-173/99) that stipulate that member states are not entitled to "make the very existence of the right" to leave "subject to any preconditions whatsoever". As such, the German provisions that terminate entitlement on 31 March would not apply if workers had not had an opportunity to take leave. Consequently, the ECJ states that if a worker has not been able to take leave, they are entitled to payment in lieu equivalent to normal salary for the period in question.

German rulings

The Schultz-Hoff case was returned to the Düsseldorf Landesarbeitsgericht, which ruled, on 2 February 2009, that the plaintiff was entitled to financial compensation for the statutory element of his untaken annual leave, but rejected a claim to additional entitlement under the prevailing collective agreement.

In a ruling made on 23 March 2009 in a separate, but related, case (9 AZR 983/07), the Federal Labour Court signalled a major shift in its approach in the light of the ECJ ruling, which will affect judgments of lower courts in Germany. Specifically, an employee who has been off work on long-term sick leave will now be entitled to accumulate leave that they have not been able to take. If the employee leaves, they will be entitled to payment for untaken leave. In the specific case before the Federal Labour Court, this applied to statutory leave entitlement only. However, commentators note that, in the past, the Court has always interpreted statute law in the light of collectively agreed provisions, not the statutory minimum. Future judgments are expected to clarify this.

Possible implications

One possible consequence of the change in approach by the Federal Labour Court is that, in the future, employers might move more swiftly to dismiss employees on long-term sick leave. At present, to dismiss fairly an employee on long-term sick leave, the employer must show that it would suffer an "unreasonable" financial burden by continuing to employ the employee. Since the employer's obligation to pay sick pay covers only the first six weeks of illness, this is often difficult to establish. In future, a small firm might argue that the need to provide for delayed payment of wages, in the form of payment in lieu for untaken annual leave, would impose such a burden.

This article is based on material provided by Pete Burgess, European Employment Review correspondent for Germany.

European Employment Review 425 (EER 425) contents