international employment law firm alliance L&E Global

Germany: Annual leave entitlements and permanent incapacity for work

An employer and an employee were in dispute over a claim for payment of outstanding annual leave after termination of employment. This is because, upon termination, existing annual leave entitlements are converted into a right to financial compensation. The plaintiffs’ claim, therefore, required an existing annual leave entitlement at the time of termination.

The reason for the termination was the claimant’s permanent incapacity to work since 2006. In June 2019, the employee was granted a corresponding reduced earning capacity allowance until the age of retirement. As a result, the employment relationship was terminated at the end of the month on the basis of a corresponding provision in the applicable collective agreement. The claimant sought financial compensation for all annual leave entitlements from 2006 to 2017.

In general, annual leave must be taken by the end of the calendar year. The entitlement is not lost at the end of the year in the event of incapacity for work, but only after 15 months, i.e. at the end of 31 May. In addition, the employer’s involvement in informing employees of the possibility of forfeiture and instructing them to take the leave is normally required for annual leave entitlements to be forfeited.

The relationship between this obligation on the employer and the permanent incapacity for work was crucial, as the employer had failed to comply with this obligation. Applying recent ECJ case law, the court held that if an employee is permanently incapacitated from the beginning of the calendar year until 31 May of the following year, the annual leave entitlement is forfeited thereafter, regardless of the employer’s compliance with the obligation to inform and instruct. This is because it is only the incapacity for work that causes the forfeiture of the annual leave entitlement, as the employee is unable to take the leave, and not the lack of compliance. Thus, the annual leave entitlement for the years 2007-2017 was found to be forfeited.

It was not clear whether the employee was incapacitated for the whole of 2006. As the employer argued that the non-compliance was immaterial to the forfeiture of the annual leave due to incapacity for work, the court considered that the burden of proof was on the employer. However, it pointed out that the employee had a secondary burden of proof since only he knew the details of his (potential) incapacity. As all the evidence presented by the employer supported the assumption of incapacity for the whole year, the employee should have provided evidence to the contrary. As he failed to do so, the court also found that there was no entitlement to annual leave for 2006 and therefore no entitlement to financial compensation.

Practical Point

In addition to properly documenting periods of incapacity to work in order to meet a potential burden of proof, it is also highly advisable to inform employees of their individual outstanding leave entitlement and the applicable forfeiture periods at various times during the year, so that they can rely on the statute of limitations regardless.