Once again: Accumulation of Annual Leave Entitlements in the case of Long-Term Illness?

17.11.2011

[] Annual leave entitlements may extinguish to a certain extent even where an employee was ill during all or part of the entitlement period and his incapacity for work continued until the end of his employment relationship. The leave entitlement must, however, continue to exist during at least such carry-over period as is compatible with the objective of recuperation. This will in any event be the case where there is provision for a carry-over period of 18 months following the end of the leave year. However, the Member States are free to adopt other rules to achieve this purpose while observing the limits imposed by the Directive (Opinion of the Advocate-General of the European Court of Justice of 7 July 2011 – C-214/10, Case "Schulte").

Problem

The Advocate General of the European Court of Justice delivered her Opinion to the court in the "Schulte" case on 7 July 2011. In it she suggests limiting the leading "Schultz-Hoff" case, which we discussed in Newsletter 1/2009. The European Court of Justice had decided in that case that the minimum annual leave granted to an employee under European law does not extinguish if he is unable to take his leave due to uninterrupted incapacitation for work. Against the background of the European Court of Justice's decision, the Federal Labour Court also adjusted its case law in its decision of 24 March 2009, which we discussed in Newsletter 2/2009.

Since then it has been the case under German law that an employee's annual leave entitlement no longer extinguishes on 31 March of the following year, where he was unable to take the leave because he was incapable of working for a period extending beyond this carry-over period. Until now neither the European Court of Justice nor the Federal Labour Court has had to decide whether there is an upper limit for the validity of annual leave entitlements or whether these can accumulate uninterrupted. The German courts of first instance have since then held in the case of long-term incapacitation for work that leave entitlements may, without any limitation, be accumulated over several years and that payment in lieu of leave must be made in the full amount when the employment contract terminates. For example, the Hessian Higher Labour Court (Landesarbeitsgericht) held in its judgment of 7 December 2010 that an employee whose long-term incapacity for work stretched over a 13-year period was entitled to 314 days of leave. As a result, the court awarded him a payment exceeding a year's salary (!).

This has rightly been criticized as an unjustified financial burden on the employer. The court rulings have, however, in the end done employees a disservice since companies now always have to consider whether they should dismiss on grounds of illness an employee who is ill over a longer period to avoid such costs. Until now it had been possible to maintain an employment relationship on a more or less cost-neutral basis until the expiry of the statutory sick pay period and thus allow the employee an opportunity to return to work. As a result of the recent rulings, it will be necessary to set up provisions for each additional year of incapacitation to cover annual leave entitlements that arise but which are not subject to extinguishment.

Opinion of the Advocate General

The Advocate General at the European Court of Justice recommended limiting this case law in her Opinion of 7 July 2011. In the case of employees unfit for work for long periods, she was also in favor of allowing leave entitlements to extinguish after a carry-over period. However, she made it a condition of such limitation that the carry-over period be measured in such a way as to achieve the "primary objective of the right, namely recuperation". As a guideline for the temporal limit, the Advocate General relied on an International Labour Organization Treaty that provides that leave entitlements may extinguish 18 months after the end of a calendar year. The Advocate General thus wishes to allow the Member States to adopt their own rules on extinguishment while suggesting a carry-over period of 18 months. If one uses the limitation of 18 months suggested by the Advocate General as a basis, sick employees who are permanently incapable of working may as a result accumulate a maximum period equal to 2.5 times their annual leave.

Comment

As a rule, the European Court of Justice follows the Advocate Generals' Opinions in its decisions. Even if we have to wait and see what the chamber rules in the decision expected to be handed down in the next few months, a decision along the lines described above from Luxembourg is likely. The European Court of Justice would thus at least limit the scope of its "Schultz-Hoff" ruling to a level more tolerable for employers.

Nonetheless, whether the expected judgment from the European Court of Justice will directly affect German rules on holiday leave entitlement remains to be seen. Ultimately, Community law only sets out employees' minimum rights and therefore individual Member States are entitled to provide for additional rights extending over and beyond such rights. So far the Federal Leave Entitlement Act (Bundesurlaubsgesetz – BurlG) does not include an 18-month carry-over period, which was the period considered adequate by the Advocate General. Instead it only provides for a three-month carry-over period, which would be too short in the view of the European Court of Justice and thus non-applicable in the event of long-term incapacity for work. Therefore, even after the European Court of Justice's judgment, we will still have to wait and see whether a comparable limitation on the accumulation of annual leave entitlements finds its way into German law. It is, on the one hand, conceivable that the German courts will be guided by European law in their development of German law. On the other hand, since the wording of the German Leave Entitlement Act does not really support any such interpretation of German law, the likelihood of the courts calling upon the legislature to act cannot be ruled out.

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