Employer’s financial risks in the event of not granting annual leave

I. Holiday right: Germany and Europe

In principle, every employee is entitled to annual leave – as emphasized by German law as well as EU law (Art. 7 (1) and (2) directive 2003/88/EC. In addition, the holiday must be taken during the current year (sec. 7 (3) Federal leave Act (“Bundesurlaubsgesetz – BUrlG”). A transfer to subsequent years is generally inadmissible (sec. 7 (3) BUrlG). Holiday can only be transferred to the following year in special cases and then only to be used within three months. However, employment contracts or collective agreements often provide for the possibility of a longer transfer period into the next year.
The problem of transferring the leave entitlement to subsequent years, however, is only dealt with in German law, not in European law. Here, therefore, national law still seems to be relevant.

II. The judgments of the ECJ, esp. judgment of 29 November 2017

Nevertheless, the ECJ has decided to the contrary in several judgments: In the Schultz-Hoff case in 2009 (docket number C-350/06), the ECJ emphasized,

“Article 7(2) of Directive 2003/88 must be interpreted as precluding national legislation or practices which provide that, on termination of the employment relationship, no allowance in lieu of paid annual leave not taken is to 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 he could not exercise his right to paid annual leave”.

Shortly thereafter, the ECJ was forced to modify its decision, stressing:

“Article 7(1) of Directive 2003/88/EC of the European Parliament and of the Council of 4 November 2003 concerning certain aspects of the organisation of working time must be interpreted as not precluding national provisions or practices, such as collective agreements, which limit, by a carry-over period of 15 months on the expiry of which the right to paid annual leave lapses, the accumulation of entitlement to such leave of a worker who is unfit for work for several consecutive reference periods”. (judgment from 22. November 2011, KHS, docket number C-214/10).

It is clear: The ECJ also decides on the transfer period for annual leave, which – so they thought so far – is limited in time. German law had to react to this and interpret sec. 7 (3) BUrlG in accordance with European law.
Surprisingly, the ECJ seems to change its position in a recent decision of 29 November 2017 (docket number C-214/16). A so-called bogus self-employed person – a worker who worked on the basis of a ‘self-employed commission-only contract’ not being entitled to the rights a worker gets (such as paid annual leave) – had sued for compensation in respect of the leave not granted to him from 1999 till 2012. It would have been expected, according to the above, that the ECJ limited the compensation. But this did not happen here. The ECJ emphasized:

“Article 7 of Directive 2003/88 must be interpreted as precluding national provisions or practices that prevent a worker from carrying over and, where appropriate, accumulating, until termination of his employment relationship, paid annual leave rights not exercised in respect of several consecutive reference periods because his employer refused to remunerate that leave.”

The result is that the employer has to financially compensate the 13 years of annual leave (ie at least 13 x 20 = 260 days). A time limit was denied. However, this does not mean that the ECJ now completely abandons its previous case-law. The ECJ wants in most cases to maintain the previous case law and to limit the accumulation of the holiday entitlement and the allowance in lieu. In particular, the judgment expressly recognizes that employers should be protected against excessive financial burden (recital 55). However, this protection is only granted if the employer really needs it. In this specific case the ECJ acknowledges, that “protection of the employer’s interests does not seem strictly necessary” (recital 59). It was only the employer to be blamed for not granting the bogus self-employed person leave. For this particular reason alone there is no time limit.

III. Consequences for the employer

The employer should therefore be “punished” for having violated regulations. In principle, he cannot therefore rely on the fact that the holiday and thus also the compensation claim cannot be accrued indefinitely. It is only important that he gives the worker the possibility to take annual leave. It is also important to check exactly whether there is bogus self-employment. Creative constructions for bypassing the rights of workers are strongly discouraged. Employers should always be advised to ensure that employees complete their vacation within one year. This minimizes the risks of – possibly even unlimited – compensation when leaving employment.