German court: annual leave cannot be waived during ongoing employment relationship

In a landmark decision, the German Federal Labor Court ruled that settlements which waive unused statutory annual leave entitlements are invalid if the employment relationship is still ongoing.

Under German law, any leave that has not been granted by the end of the employment relationship must be compensated for financially. Therefore, it has been common practice to compensate any outstanding annual leave claims during the notice period by irrevocably releasing the employee until the termination date. Both parties would then agree that all annual leave has already been granted.

“However, the Federal Labor Court has now made it clear that this approach is no longer permissible while the employment relationship is still ongoing,” said Gamze Radovic, an employment law expert at Pinsent Masons.

The dispute here centred around compensation for seven days of statutory leave from 2023. The initial legal proceedings followed the employer’s decision to dismiss the employee. The employee had been unable to work due to illness since the start of 2023 and therefore could not take his statutory annual leave. In March 2023, the parties concluded a court settlement ending the employment relationship and agreeing on a severance payment of €10,000 to be paid by the employer, explicitly stating that any outstanding annual leave entitlements had already been granted. However, the employment relationship had not formally ended, as the notice period had not yet expired.

The employee later contested the settlement, claiming an additional €1,615.11 plus interest for statutory minimum leave that could not be taken due to ongoing illness. He argued that the waiver of the mandatory minimum leave in the court settlement was invalid. The Federal Labour Court ruled in favour of the employee, finding that the clause stating the annual leave had already been granted was invalid under the given circumstances. Consequently, as the employment relationship had already ended, the employee had to receive monetary compensation for the outstanding annual leave.

The Federal Labour Court emphasised that, under the German Federal Vacation Act, any agreement that disadvantages the employee with regard to the statutory minimum amount of annual leave is invalid. The statutory entitlement to annual leave and the entitlement to compensation for statutory annual leave, which only arises upon the termination of the employment relationship, may not be excluded or limited in advance. This principle also applies if the employment relationship is terminated through a court settlement and it is clear that the employee will be unable to take their remaining leave due to illness.

The court also referenced article 7 (2) of the European Working Time Directive (2003/88/EC), which stipulates that paid annual leave cannot be replaced by an allowance in lieu, except when the employment relationship has ended. As the employment was still ongoing at the time of the settlement, the statutory leave entitlement remained protected and non-negotiable.

Radovic said: “The ruling highlights that the statutory minimum amount of leave cannot be waived or compensated for while the employment relationship is still active, even if the employee is on notice or incapacitated for work until the end of the notice period. Employers should differentiate between statutory and contractual, additional, leave when drafting settlements as this restriction only applies to statutory leave. Where possible, employers should grant outstanding leave through irrevocable release until the end of the notice period. It is important to consider that annual leave can only be granted during irrevocable release, not during revocable release. It is also vital for employers to factor in the risk of unresolved annual leave claims when calculating severance payments.”