Germany: No Valid Waiver of an Employee’s Statutory Vacation Entitlement by Way of Court Settlement

In an ongoing employment relationship, an employee cannot validly waive their statutory minimum leave entitlement, even by means of a court settlement. This also applies if the termination of the employment relationship is certain and it is foreseeable that the employee will not be able to take the leave before then due to sickness-related incapacity to work.

Under German law, every employee is entitled to at least 24 working days of paid vacation per year (Section 3 para. 1 of the German Federal Leave Act (Bundesurlaubsgesetz – BUrlG)), which corresponds to four weeks based on a six-day working week. The full vacation entitlement arises for the first time after six months of uninterrupted employment.

Background

The plaintiff in the recent case before the Federal Labour Court was employed by the defendant as an operations manager from 1 January 2019 to 30 April 2023. In 2023, he was continuously unable to work due to illness from the beginning of the year until the end of his employment and was therefore unable to take his vacation entitlement for that year. In a court settlement dated 31 March 2023—i.e., before the legal end of the employment relationship—the parties agreed, among other things, that vacation entitlements had been “granted in kind”—a common practice in the form of a so-called factual settlement.

The plaintiff subsequently demanded that the defendant compensate him for the seven days of statutory minimum leave from 2023 that were still outstanding, claiming that the court settlement was invalid.

 

Key Issues

The Federal Labour Court ruled that the plaintiff is entitled to compensation for his untaken statutory minimum leave from 2023 in accordance with Section 7 para. 4 of the German Federal Leave Act. The vacation entitlement was not extinguished by the agreement in the court settlement of 31 March 2023. The agreement that vacation entitlements were deemed to have been granted in kind was considered invalid insofar as it was intended to regulate an exclusion of the statutory minimum vacation that is inadmissible under Section 13 para. 1 sentence 3 of the German Federal Leave Act.

Neither the statutory entitlement to paid vacation nor any future entitlement to financial compensation for such statutory minimum vacation arising upon the legal termination of the employment relationship may be excluded or restricted in advance. This applies even if, at the time of concluding a court settlement that regulates the termination of the employment relationship in return for payment of a severance, it is already clear that the employee will no longer be able to take the statutory minimum leave due to sickness-related incapacity to work.

Paid minimum leave may not be replaced by financial compensation except upon termination of the employment relationship. In the existing employment relationship, the employee may therefore not validly “waive” the claim to statutory minimum leave or a corresponding financial compensation.

Practical Points

• The ruling emphasizes the importance of the statutory minimum leave entitlement and further restricts the freedom of the parties to the employment contract to make arrangements in this regard. Employers must be aware that waivers of statutory leave entitlements may not uphold depending on the circumstances and employees may be able to assert compensation claims in addition to the package agreed in a settlement.
• However, the following options currently remain possible:
  • If a settlement is only concluded after the legal end of the employment relationship, the remaining leave entitlement has already transformed into an entitlement to financial compensation. The parties are free to reach an agreement regarding this compensation claim and the employee may also waive it.
  • Furthermore, the ruling of the Federal Labour Court only concerns the statutory minimum holiday entitlement. There is generally more freedom to structure additional leave that goes beyond this, whether contractual or covered by collective agreements: agreements are widely possible with regard to expiry, exclusion or compensation, provided that they explicitly relate only to this additional leave above the statutory minimum.
  • It is permissible to stipulate that any compensation that becomes due for untaken statutory leave is subtracted from a severance payment agreed by way of settlement. Such a mechanism makes it less attractive for the employee to claim such compensation after a settlement has been reached. Alternatively, employers can of course also insist to actually pay out untaken leave entitlements and can consider this as part of the overall budget for a settlement.