The expiry of holidays is actually clearly regulated in the Federal Leave Act. In principle, leave must be granted and taken in the current calendar year. A transfer of the vacation to the next calendar year is possible only up to 31 March for operational or illness-related reasons. After the 31. March it expires finally.
However, there are two major exceptions.
Voluntary derogations in favour of the employee
The Federal Leave Act may be deviated from in favour of the employee. If the employer determines that the leave from the previous year may still be taken in the following year without there being a reason for the transfer, this benefits the employee. The vacation does not expire therefore in principle to the year end.
Expiry of leave: special regulations for permanently ill employees
The European Court of Justice (ECJ) ruled in the “Schultz-Hoff” case that in the event of permanent incapacity to work due to illness, the holiday may not expire on 31 March of the following year. However, since employees who are continuously incapacitated for work during the calendar year and the 3-month carry-over period do not actually have the opportunity to make use of their holiday entitlement, the expiration regulation is invalid in this case, as otherwise employees who are permanently incapacitated would be deprived of their entitlement to paid annual leave, which is incompatible with European law. According to the European Court of Justice, the holiday entitlement of a permanently ill employee must therefore be maintained.
Transfer period: 15 months instead of 3 months
In the subsequent “KHS” decision, the ECJ ruled that a worker who is continuously incapacitated for several years is not entitled to accumulate indefinitely all entitlements to paid annual leave acquired during the period of his absence from work. For this reason, the ECJ accepts national rules which require that leave entitlement expires after a carry-over period of 15 months.
In the case of termination of employment by notice or termination agreement, however, this case law can lead to comparatively high claims for holiday pay, as you can read here.
Implementation by the Federal Labour Court
The Federal Labour Court has transposed these decisions into national law. However, it has decided that the above-mentioned requirements of the ECJ only apply to the statutory minimum holiday of 24 working days or 20 working days, since the relevant European Directive also only prescribes a minimum annual holiday of 4 weeks.
Any further holiday entitlements can therefore continue to expire after the three-month transfer period has expired in the event of permanent illness of an employee. However, this must be expressly agreed in the employment contract. Otherwise, the additional leave also expires 15 months after the end of the calendar year.