European annual leave law tightened again by ECJ

Yet again: New risks for German companies, especially with “self-employed” staff

On 29 November 2017, the European Court of Justice (ECJ) decided in regard to a request for a preliminary ruling of the Court of Appeal (England & Wales) that leave not taken must be carried over and be accumulated, if required, until termination of the employment relationship if that leave had not been taken due to the employer's refusal to compensate such leave periods. This will apply even where national laws on annual leave provide otherwise, i.e. that leave claims lapse after a certain period of time (Case C-214/16 King v The Sash Window Workshop Ltd et al.).

The consequences of this judgment on German annual leave law will be far-reaching. The risk that employers will be obliged to comply with leave entitlements accumulated over years is substantially increased. Notably, this also applies to (alleged) self-employed staff, such as freelancers and independent contractors, who subsequently turn out to be false self-employed (so-called Scheinselbständigkeit).

The ECJ case: 24 weeks of leave accumulated over 13 years

The plaintiff, Mr King, had been working under a "self-employed commission-only contract" for The Sash Window Workshop Ltd ("SWW") since 1999 for an overall period of 13 years. Mr King had refused to sign an employment contract – an offer that SWW had made to him during this period. As a freelancer, Mr King had no contractual right to paid leave, so that he had only taken a few days leave each year while working for SWW. Later, he turned out to be false self-employed.

When SWW terminated the contract with Mr King, he sought to recover payment for his annual leave – that taken and not paid as well as that not taken – for the entire period of his 13 years of engagement. He took the position that he had been a worker so that he would be entitled to paid leave according to national annual leave law (which implements Directive 2003/88/EC).

The English courts had already determined that Mr King qualified as a "worker" (= false self-employment). Right until the very end, however, the Courts were divided as to whether SWW had to also compensate the leave which – pursuant to national law – would have been forfeited (similar as in section 7 (3) of the German Federal Annual Leave Act). The leave in question amounted to more than 24 weeks.

Mr King argued that the forfeiture rules would not apply in his case. He had not taken leave solely because SWW would not have compensated it. In this respect, he referred to the Schultz-Hoff judgment of 2009, in which the ECJ referred to Directive 2003/88/EC and decided that national forfeiture rules would violate European law if they provided for the forfeiture and lapse of claims for leave if the employee could not take such leave due to illness (Judgment of the ECJ of 20 January 2009 in Case C-350/06 inter alia). The Court of Appeal referred the case to the ECJ and asked to what extent English annual leave rules in the present case were compatible with European law.

ECJ: No forfeiture of leave, not even after 15 months

This judgment is crucial: The ECJ ruled that the employer cannot rely on statutory forfeiture rules if the employee did not take his leave because the employer refused to grant paid leave. Furthermore, and this is particularly problematic for employers, leave should not lapse and become forfeited after 15 months, despite the judgment in the Schulte case, where leave was not taken due to illness (Judgment of the ECJ of 22 November 2011 in Case C-214/10).

The ECJ justified its decision by arguing that the right to paid annual leave must be regarded as a particularly important principle of EU social law. A worker faced with circumstances, which give rise to uncertainty as to the remuneration owed during the leave period, would not be able to fully benefit from that leave as a period of relaxation and leisure. If he has to worry about not receiving remuneration during leave, this could also act as a deterrent to taking leave. The right to leave should also not lapse after a period of 15 months. Such an interpretation would result in an unlawful enrichment of the employer and would be inconsistent with the purpose of the Directive to protect employee health.

Section 7 (3) of the German Federal Annual Leave Act will no longer be reliable

The judgment will have a huge impact on German annual leave laws, especially with regard to the interpretation of section 7 (3) of the German Federal Annual Leave Act (Bundesurlaubsgesetz), which – according to its wording – provides for forfeiture and lapse of leave entitlements as of 31 March of the following year at the latest. The statutory forfeiture of annual leave can no longer be relied upon, not only in cases where the leave has not been taken due to illness, but now also where leave is not taken due to the "employer's refusal to remunerate such leave". As a result, extensive leave entitlements can be accumulated. Where an employer refuses to remunerate leave based on section 7(3) of the German Federal Annual Leave Act, the decisive question will now be whether the requirements of that provision are met where the employer fails to encourage the employee to actually take his leave.

When drafting leave provisions for employment agreements this is one more reason to differentiate between the compulsory minimum leave and leave that exceeds the statutory entitlement. The ECJ judgment only relates to the minimum annual leave provided for in Directive 2003/88/EC (four weeks), so that any additional leave granted may be governed by individual rules concerning forfeiture and lapse of leave, etc.

Third party staff: Strict compliance is a must

As far as freelancers and other self-employed third party staff are concerned, such leave clauses are not helpful at all. Under German law, it is characteristic for self-employed persons not to be entitled to leave. Such leave entitlements – and this is the paradox – would indicate their status as an employed person and their dependence. Therefore, it is and will remain necessary to follow a strict compliance process when engaging third party staff. Both large and small enterprises should specify and implement clear rules concerning the use of third party staff. Without such rules, it is now even more difficult to justify the engagement of third party staff; this ruling of the ECJ is yet more proof of the need for clear rules.

If you have any questions related to this topic, please feel free to contact
Dr Franziska von Kummer (Lawyer, LL.M., M.C.L., Licensed Specialist for Labour Law).