BAG on Holiday Forfeiture and Limitation

The BAG holiday forfeiture ruling at a glance

In the BAG holiday forfeiture ruling of 20 December 2022 (9 AZR 266/20), the Federal Labour Court held that the statutory minimum holiday entitlement is subject to the regular three-year limitation period under the German Civil Code, but that the limitation period does not begin to run at the end of the holiday year unless the employer has actually put the employee in a position to take the leave. In practice, this means that employees who were never asked to take their holiday and informed that it would otherwise be lost can claim leave, or payment in lieu on termination, going back many years.

The decision implemented the CJEU's judgment of 22 September 2022 in LB v TO (C-120/21), which arose from a referral by the BAG in the same case.

The BAG holiday forfeiture ruling completes a line of case law that has fundamentally changed holiday law in Germany since 2018. Holiday no longer lapses automatically at the end of the year or the carry-over period, and employers can no longer rely on the general limitation rules to avoid old claims. The key to both forfeiture and limitation is now the employer's duty to cooperate: to request employees to take their leave and to inform them clearly of the consequences if they do not.

Facts of the case

The claimant worked for a tax adviser from 1996 to July 2017 as a tax clerk and accountant, four days a week, with an annual entitlement of 24 working days of leave. In March 2012 her employer confirmed in writing that she had 76 days of untaken leave from previous years as of 31 December 2011. In the following years she took some, but not all, of her leave, partly because of high workload.

On termination, the employer paid her for 14 days. She sued for payment in lieu of a further 101 days, arguing that her entitlement had not lapsed because the employer had never asked her to take leave or warned her that it would be forfeited.

The employer argued that any entitlements from the years up to 2014 were time-barred under the three-year limitation period of § 195 BGB. The Regional Labour Court of Düsseldorf (judgment of 21 February 2020 – 10 Sa 180/19) found for the claimant. On the employer's appeal, the BAG referred the question whether holiday can become time-barred under these circumstances to the CJEU.

The CJEU's answer in C-120/21

In its judgment of 22 September 2022 (C-120/21), the CJEU held that Article 7 of the Working Time Directive and Article 31(2) of the Charter of Fundamental Rights preclude national legislation under which the right to paid annual leave acquired in respect of a reference period is time-barred after three years, starting at the end of the year in which the right arose, where the employer has not actually put the worker in a position to exercise that right.

The Court reasoned that an employer that does not fulfil its obligations cannot rely on legal certainty to benefit from its own failure, at the expense of the worker's fundamental right to rest.

The CJEU's decision built on its earlier rulings of 6 November 2018 in Max-Planck-Gesellschaft (C-684/16) and Kreuziger (C-619/16), under which leave may only lapse at the end of the reference or carry-over period if the employer has enabled the employee to take it, in particular by providing sufficient information, and the employee nevertheless chose not to take it.

The holdings of the BAG holiday forfeiture judgment

The BAG dismissed the employer's appeal and set out two guiding principles. First, the claim to the statutory minimum holiday is a claim within the meaning of § 194(1) BGB and therefore in principle subject to limitation.

Second, interpreting § 199(1) BGB and §§ 1, 3(1) and 7(1) and (3) of the Federal Holiday Act (Bundesurlaubsgesetz, BUrlG) in conformity with EU law, the limitation period does not necessarily begin at the end of the year in which the entitlement arose and the employee had knowledge of it. It is also necessary that the employer has put the employee in a position to actually take the leave. The EU-law requirements specified by the CJEU amount to "another start of the limitation period" within the meaning of § 199(1) BGB.

The employer's duties to request and inform

Since the BAG's implementation of the 2018 CJEU case law, employers must, in good time, request each employee individually to take their leave and inform them clearly that the leave will lapse at the end of the holiday year or the carry-over period if not taken. The information must be concrete and transparent, stating the number of days outstanding for the specific year, and it must be given early enough that the employee can actually take the leave. General statements in employment contracts, policies or on the intranet are not sufficient. The employer bears the burden of proving that it fulfilled these duties.

Under § 7(3) BUrlG, holiday must be granted and taken in the current calendar year; carry-over to the first three months of the following year is permitted only for urgent operational or personal reasons. Where the employer fulfils its cooperation duties and the employee still does not take the leave, the entitlement lapses as provided by statute. Where the employer does not fulfil them, the entitlement is added to the following year's entitlement and the same rules apply again, so untaken leave can accumulate over many years.

Long-term illness and payment in lieu on termination

Special rules apply where employees are unable to work due to long-term illness. The CJEU and the BAG accept that, in such cases, leave may lapse 15 months after the end of the holiday year even without the employer's cooperation, because the employee could not have taken the leave anyway. However, the BAG has held that this applies only where the employee was unable to work throughout the relevant period; for leave from a year in which the employee worked for part of the year before falling ill, the employer must have fulfilled its cooperation duties for the lapse to occur.

When employment ends, untaken leave must be paid in lieu under § 7(4) BUrlG. Accumulated entitlements from earlier years can therefore turn into significant payment claims at termination, often in combination with severance negotiations. Employers should calculate potential exposure before negotiating settlements and ensure that settlement agreements deal with holiday entitlements, bearing in mind that employees cannot waive the statutory minimum leave during the employment relationship.

Dealing with legacy entitlements

Many employers discover after the BAG holiday forfeiture ruling that they did not send compliant notices in past years. The accumulated statutory leave of those years has neither lapsed nor become time-barred, so it remains claimable. There are several ways to deal with this. The cleanest is to start sending compliant notices now, so that from the current year onwards the ordinary rules on lapse and limitation apply again.

For the old entitlements, the position is less settled. Employers often request employees to take the accumulated leave within a defined period and inform them that it will otherwise lapse. Whether such a late notice can bring about a lapse of entitlements from earlier years depends on the circumstances and has not been fully clarified; at the very least, the request must give the employee a realistic opportunity to take all the outstanding leave, which may be difficult where many days have accumulated. Employers should therefore plan leave schedules with affected employees and document them.

Alternatively, employer and employee can agree that accumulated leave will be taken within a defined period. A waiver of the statutory minimum leave in exchange for payment is not permitted while the employment relationship continues, because § 13(1) BUrlG prevents deviations to the employee's detriment. After termination, the claim to payment in lieu is an ordinary monetary claim that can be settled, for example in a settlement agreement before the labour court. Employers should therefore address holiday entitlements expressly in termination negotiations and quantify them early.

Consequences for employers

The BAG holiday forfeiture case law affects balance sheets, HR processes and transactions. Holiday accruals may need to be increased where cooperation duties were not met. Payroll and time management systems should track leave by year, distinguish statutory from contractual entitlements and generate the required notices automatically, with records of delivery that can be produced in court.

In acquisitions and business transfers, buyers should examine whether the target has fulfilled its duties, because accumulated entitlements pass to the acquirer under § 613a BGB. Contractual holiday exceeding the statutory minimum can be regulated differently, for example by clauses providing that additional contractual leave lapses at the end of the year regardless of cooperation duties, but such clauses must clearly distinguish between statutory and contractual leave. Collective agreements may contain their own rules on additional leave, which should be checked as well. Finally, employers with international workforces should note that the underlying EU case law applies across all Member States, so group-wide holiday policies need a consistent approach to notices and carry-over.

How TRW & Co helps

We advise employers on holiday law after the BAG holiday forfeiture ruling. We draft notification templates and contractual holiday clauses, assess accumulated entitlements and exposure, negotiate settlements and defend employers in claims for leave and payment in lieu. Our work connects with our dismissals and restructuring practice; see also our notes on holiday entitlement and forfeiture, settlement agreements and business transfers. Please contact us to review your holiday processes. This briefing is general information and not legal advice.