“Unlimited holiday entitlement” and its compatibility with German law

The granting of “unlimited” or “uncapped” holiday entitlements in the employment relationship has been known for some time in the U.S. jurisdiction. This means that employers commit to let their employees decide for themselves how many vacation days they want to take per calendar year, i.e. to grant them initially unlimited holidays. Nowadays, the phenomenon of unlimited holiday entitlements is increasingly gaining ground in Germany, so far primarily in the start-up and creative industries, but also at some financial institutions . This raises the question whether such vacation models are compatible with the principles of German holiday law, what risks exist and how these can be mitigated.

Statutory holiday entitlement as minimum

Under German employment law, only an upwardly unlimited holiday entitlement can be agreed with employees. The lower limit of the holiday entitlement for employees is always the statutory holiday entitlement. The German Federal Leave Act (Bundesurlaubsgesetz) provides for a minimum entitlement of e.g. 20 days of vacation per year for a five-day week. Contractual deviations from this to the detriment of employees cannot validly be agreed. However, employers are of course free to grant their employees a contractual entitlement to additional holidays. This is usually done in the form of granting a specific number of vacation days.

Legal risks for employers

Granting holiday entitlement to an “unlimited extent” thus initially is not in line with the principles of German holiday law. This becomes particularly evident with regard to compensation of outstanding holiday entitlements upon termination of the employment relationship:

In principle, the employees' holiday entitlement arises for all periods during which the employment relationship actively exists until its termination. If the employer does not comply with his cooperation obligations, i.e. if he fails to inform the employees about outstanding holiday entitlements, to request them to take the holiday and to inform them clearly and in good time that the holiday entitlement will otherwise expire at the end of the calendar year or the carryover period, untaken holiday entitlements will generally not expire after the end of the vacation year or the carryover period. If holiday entitlements can no longer be fulfilled in full or at least in part due to termination of the employment relationship, the remaining holiday entitlement must be financially compensated. The value of a day's leave is calculated on the basis of the employee's average remuneration of the previous 13 weeks.

Implementation options

Granting holiday entitlement to an “unlimited extent” may therefore in practice result in unlimited financial obligations of the employer. It is advisable to already counteract this risk when implementing corresponding holiday models. To this end, any compensation claims can for example be contractually limited to the statutory holiday entitlement.

Furthermore, studies carried out to date have shown that employees tend to take hardly any more vacation days under such holiday models than they are already statutory entitled to. Nevertheless, there is a risk that employees could actually make use of the possibility to take an unlimited amount of holidays, which can lead to a decrease in productivity and to difficulties with regard to the ability of individual departments to act. It is also conceivable that by consistently taking a certain day of the week as a vacation day, for example, individual employees could in fact force part-time employment - with full remuneration.

Corresponding risks should therefore also already be taken into account when implementing respective holiday models. Various ways of avoiding abuse are conceivable: First of all, agreeing on a requirement of the employer’s consent regarding the desired amount and timing of holidays. Furthermore, it seems sensible to specify a maximum number of team members who may go on holidays at the same time. When establishing corresponding holiday principles, a works council's co-determination rights may have to be observed. Another conceivable option to consider could be granting the unlimited holiday entitlement only after completion of the probationary period or after six months of employment.

Conclusion

Introducing “unlimited holiday entitlements” can be a tool to recruit employees. However, it should be carefully planned and implemented, taking into account the pitfalls outlined above. It should also be borne in mind that a corresponding holiday model can in principle no longer be changed unilaterally, i.e. without the consent of the employees, or even reversed. As far as can be seen, the German labour courts have not yet been concerned with such “unlimited holiday entitlement” models. The first decisions of German labour courts therefore remain to be awaited. Alternatively, employers can consider sabbatical models, which in principle may be easier to arrange due to the lack of remuneration obligations of the employer during the sabbatical.