Holiday Entitlement and Forfeiture

Holiday entitlement in Germany: when does it lapse?

Statutory holiday entitlement in Germany no longer lapses automatically at the end of the year. Under the Federal Holidays Act (Bundesurlaubsgesetz, BUrlG), leave must be granted and taken in the current calendar year, and it can be carried over only for urgent operational or personal reasons until 31 March of the following year (§ 7(3) BUrlG).

Following the case law of the Court of Justice of the European Union, however, the Federal Labour Court (Bundesarbeitsgericht, BAG) holds that the statutory minimum leave expires only if the employer has first enabled the employee to take it, by asking the employee to take the leave and warning in good time that it will otherwise lapse. If the employer has not done so, untaken leave accumulates from year to year and does not even become time-barred under the general limitation rules.

For employers, this turns an administrative routine into a significant liability. Untaken leave from years ago can be claimed as payment in lieu when an employment relationship ends, and the amounts are often raised in dismissal disputes and severance negotiations. A documented annual information process is the most effective protection.

The statutory minimum and contractual leave

§ 3(1) BUrlG grants at least 24 working days (Werktage) of leave per year. Because the statute counts all calendar days except Sundays and public holidays as working days, this corresponds to 20 days for a five-day week. Severely disabled employees are entitled to five additional days per year under Book IX of the Social Code. Many employment contracts and collective agreements grant 25 to 30 days for a five-day week.

The CJEU-driven rules on forfeiture apply in full to the statutory minimum entitlement. For additional contractual leave, the parties are free to agree different rules, for example that contractual leave lapses at the end of the carry-over period regardless of the employer's information. The BAG, however, requires clear indications that the parties intended to treat the two components differently. Where the contract simply provides “30 days of annual leave” without distinguishing, the statutory rules apply to the entire entitlement. Well-drafted contracts therefore separate the statutory and the additional leave and specify the order in which they are used.

Changes in the working pattern need care. Where an employee moves from five to three days per week, leave already earned at the previous rhythm may not simply be converted to a lower number of days; under CJEU and BAG case law, leave accrued before the change keeps its value. The same applies in reverse when part-time staff increase their hours. Payroll and time-recording systems should therefore calculate leave in periods, not only on the current contractual pattern, and the annual information letter should reflect the correct balance.

The employer's duty to inform and request

The turning point was the CJEU's judgment of 6 November 2018 in Max-Planck-Gesellschaft zur Förderung der Wissenschaften, C-684/16. The Court held that Article 7 of the Working Time Directive and Article 31(2) of the Charter of Fundamental Rights preclude national rules under which a worker automatically loses untaken leave merely because he or she did not apply for it. The employer must actually enable the employee to take the leave.

The BAG implemented this in its judgment of 19 February 2019 – 9 AZR 423/16. Interpreting § 7 BUrlG in conformity with the directive, the court held that the statutory leave lapses at the end of the calendar year or a permitted carry-over period only if the employer previously put the employee in a position to take the leave and the employee nevertheless chose not to. The employer must, in concrete terms and in complete transparency, ask the employee to take the leave and inform him or her clearly and in good time that it will otherwise lapse.

In practice, compliant information has the following features:

• it is individual, addressed to each employee, not merely a general notice on the intranet;
• it states the specific number of days still available for the current year, including any carried-over days;
• it asks the employee to apply for and take the leave within the calendar year or the carry-over period;
• it explains clearly that the leave will lapse at the end of that period if not taken;
• it is given in good time, typically early in the year with a reminder in the autumn, and repeated whenever the balance changes significantly;
• it is documented, so that the employer can prove receipt in a later dispute.

No escape through limitation

Employers hoped that old leave could at least become time-barred after three years under the general rules of the Civil Code. The CJEU rejected this in its judgment of 22 September 2022, LB, C-120/21: the limitation period cannot start to run unless the employer has enabled the worker to take the leave. The BAG followed with its judgment of 20 December 2022 – 9 AZR 266/20. The statutory minimum holiday entitlement is subject to limitation under § 194(1) BGB, but the three-year period does not necessarily begin at the end of the holiday year. It begins only at the end of the year in which the employer informed the employee and asked him or her to take the leave.

The consequence is that holiday entitlement can accumulate over a long period where the employer has never informed employees. In the case before the BAG, the employee claimed payment in lieu of 101 days of leave accrued over several years. Employers who have not yet introduced an information process cannot cure the past, but they can stop the accumulation from now on: once the employer gives proper information, old leave lapses at the end of the current year (or carry-over period) if the employee still does not take it.

Holiday entitlement during long-term illness

Long-term illness is treated differently. An employee who is unable to work throughout the holiday year and the carry-over period cannot take leave, so the information duty cannot achieve its purpose. Under established case law of the BAG, following the CJEU, statutory leave of such employees lapses 15 months after the end of the holiday year in which it arose, regardless of whether the employer has given information.

The CJEU refined this in its judgment of 22 September 2022 in Fraport and St. Vincenz-Krankenhaus, C-518/20 and C-727/20. Where an employee actually worked during part of the holiday year before becoming permanently unable to work or fully incapacitated, the leave accrued for that year lapses after 15 months only if the employer had, in good time, enabled the employee to take it. The BAG applied this in its judgment of 20 December 2022 – 9 AZR 245/19. Employers should therefore give the annual information to all employees, including those who later fall ill, because it secures the 15-month lapse for the leave of the year in question.

Payment in lieu on termination

When an employment relationship ends and leave can no longer be granted, it must be paid out (§ 7(4) BUrlG). The payment in lieu covers all leave that has not lapsed, including leave from earlier years that has accumulated because the employer did not inform the employee. The amount is calculated on the basis of average earnings over the last 13 weeks under § 11 BUrlG.

Some points to consider in exit negotiations:

• During a notice period, the employer can grant outstanding leave by releasing the employee from work, but the release must clearly state that it is granted as holiday and that remuneration is paid for the leave days; an unspecified garden leave does not use up leave entitlement.
• An employee cannot waive the statutory minimum leave while the employment continues. Settlement agreements should therefore deal with leave by confirming that it has been taken or by settling the payment in lieu after termination.
• Claims for payment in lieu after termination are ordinary monetary claims and can be subject to contractual or collective exclusion periods, provided the exclusion clause is valid.

Holiday claims are a recurring item in dismissal disputes and settlement talks; our page on dismissals and restructuring covers the wider context.

Employer checklist for holiday entitlement

1. Introduce an individual, documented information process for all employees, including those on long-term sick leave and parental leave.
2. Review employment contracts and separate statutory and additional contractual leave, with clear lapse rules for the latter.
3. Agree general holiday principles and the holiday plan with the works council, which has a co-determination right under § 87(1) no. 5 of the Works Constitution Act.
4. Reconcile time-recording and payroll systems so that balances are accurate.
5. Assess existing accumulated leave as a potential liability in balance sheets and transactions.
6. Check how leave is handled in release clauses and settlement agreements.

Accumulated holiday is also a due diligence item in acquisitions; see our article on pension liabilities in M&A deals for related employment liabilities, and our article on fixed-term employment and part-time work for leave calculations when working patterns change.

How TRW & Co helps

We help employers manage holiday entitlement risks: designing compliant information letters and HR processes, drafting contract clauses that separate statutory and contractual leave, and negotiating holiday principles with works councils. In terminations and settlements, we quantify and address claims for payment in lieu, including accumulated leave from earlier years. In transactions, we assess holiday liabilities as part of employment due diligence. We represent employers before the labour courts where claims are disputed. For more on our employment practice, see employment and pensions, or contact us directly. This article is general information and not legal advice.