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"Monthly Dose" Employment Law: July 2023

Current case law in employment law

The July 2023 edition of our "Monthly Dose" Employment Law on current case law explains the judgments of the German Federal Labour Court (Bundesarbeitsgericht, BAG) dated (1) 9 February 2023 (7 AZR 266/22) on the fiction of an unlimited employment due to granting of remaining vacation entitlements after the expiration of a fixed term employment, (2) 20 December 2022 (9 AZR 266/20) on the statute of limitations on vacation entitlements, (3) 8 December 2022 (6 AZR 31/22) to consider the proximity to pension in the social selection at dismissals due to operational reasons, (4) 29 March 2023 (5 AZR 255/22) to the readjustment of employee’s will to perform his/her job activity in case of default of acceptance wages dismissal lawsuits as well as (4) of European Court of Justice (ECJ) dated 27 April 2023 (case C 192/22) on the forfeiture of vacation entitlements in the event of incapacity to work during partial retirement.

1. No indefinite continuation of the fixed-term employment if vacation is granted after the expiration of the fixed period (BAG judgment dated 9 February 2023, 7 AZR 266/22)

In its judgment of 9 February 2023 (7 AZR 266/22), the German Federal Labor Court (Bundesarbeitsgericht - BAG) had the opportunity to clarify that a fixed-term employment is not continued as an unlimited employment in accordance with Sec. 15 (6) of the German Part-time and Fixed-Term Act (Teilzeitbefristungsgesetz, TzBfG) because the employer unilaterally performs his contractual obligation after the expiration of the fixed term without accepting the work performance of the employee.

In the facts underlying the decision, the plaintiff was employed in a fixed-term employment with the defendant employer until 30 September 2020. On 9 September 2020, the employer granted the plaintiff vacation for the period from 1 October 2020 to 3 October 2020, from 5 October 2020 to 0 October 2020, from 12 October 2020 to 16 October 2020, from 19 October 2020 to 23 October 2020 and from 26 October 2020 to 31 October 2020 via the software tool "myTime" operated by the employer for the implementation of the employment. Subsequently, the employer issued the plaintiff an interim reference for the period from 1 August 2019 to 30 September 2020. 

On 15 November 2020, the plaintiff filed the lawsuit for declaration of an indefinite employment in accordance with Sec. 15 (6) TzBfG, according to which a fixed-term employment which is continued with the knowledge of the employer after the expiry of the fixed term is deemed to be extended for an indefinite period if the employer does not irrevocably object to the fixed term. The plaintiff based his action on the fact that the employer had granted him vacation beyond the fixed-term period and had only issued him an interim reference on the cut-off date of 30 September 2020. These circumstances preclude a continuation of the activity within the meaning of Sec. 15 (6) TzBfG and would thus establish an unlimited employment relationship.

The BAG dismissed the action. In its reasoning, it stated that for the fiction of an unlimited employment pursuant to Sec. 15 (6) TzBfG - according to its established case law - conclusive behavior of the parties is required which is expressed in the form of a tacit extension of the employment. Such an intention is to be affirmed if the employee continues to work with the knowledge of the employer or his authorized representative. The continuation of the work performance by the employee with the knowledge of the employer usually expresses this intention. For this purpose, the employee must continue his work performance consciously and with the willingness to continue to fulfill the obligations arising from the employment relationship. The unilateral fulfillment of the employer's performance obligations in the form of remuneration payments is not sufficient for the continuation of an employment if no actual performance of the employee is claimed in return. Continuation acts carried out exclusively by the employer beyond the end of the fixed term, as in the case of vacation or compensation for time off for overtime worked, do not lead to an employment relationship of indefinite duration. During the vacation, the employee also does not owe any duties under the employment contract as there is no contractual duty to rest. In this respect, the meaning and purpose of the fiction of an unlimited employment relationship determined in Sec. 15 (6) TzBfG do not require that the unilateral fulfillment of performance obligations by the employer be regarded as an act of continuation within the meaning of the provision.

Consequences for practice

If an employee is entitled to residual vacation or compensatory time off for overtime or extra work beyond the date of the contractual termination of the fixed-term employment relationship, the granting of such entitlements does not in itself lead to the fiction of an unlimited employment relationship pursuant to Sec. 15 (6) TzBfG. From a practical point of view, employers are nevertheless still recommended to completely wind up the fixed-term employment relationship before the expiry of the time limit in order to counteract the risks of the fictitious effect of Sec. 15 (6) TzBfG from the outset and, in particular, to prevent the employee from actually performing work for the employer while claiming residual leave entitlements after the expiry of the time limit and thus claiming the fictitious effect of Sec. 15 (6) TzBfG.

2. Three-year limitation period for vacation claims shall not commence until the end of the calendar year in which the employer has complied with its obligations to cooperate, and the employee has nevertheless not taken the vacation of own free will (BAG judgment dated 20 December 2022, 9 AZR 266/20).

In its judgment of 20 December 20, 2022 (9 AZR 266/20), the BAG had the opportunity to assess the question of the statute of limitations for vacation and vacation compensation claims as well as the point in time at which the statute of limitations begins, and in this respect to further substantiate its case law on vacation law.

In the case underlying the decision, the parties disputed the settlement of vacation claims from a former employment. The defendant employer employed the plaintiff from 1 November 1996 to 31 July 2017, and the plaintiff had an annual entitlement of 24 vacation days. During the performance of the employment, the defendant did not grant the plaintiff the statutory minimum vacation entitlements, and did not request the plaintiff to take her vacation, nor did he inform the plaintiff that leave not requested may be forfeited. 

After termination of the employment, the defendant granted the plaintiff vacation compensation for 14 vacation days. The plaintiff subsequently demanded compensation for additional 101 vacation days (with monetary equivalent of EUR 23,092.64). The plaintiff invoked Sec. 7 (4) of the German Federal Vacation Act (Bundesurlaubsgesetz, BUrlG), according to which vacation must be compensated if the vacation can no longer be granted in whole or in part due to termination of the employment relationship. Since the defendant had not complied with his obligations to cooperate in pointing out concretely existing vacation entitlements and a forfeiture in the event of non-utilization - in accordance with the more recent case law of the BAG - the vacation entitlements would also have continued to exist beyond the time limits specified in Sec. 7 (3) BUrlG. Pursuant to Sec. 7 (3) BUrlG, the (statutory minimum) vacation must be granted and taken in the current calendar year, a transfer of vacation to the next calendar year is only permissible for urgent operational reasons or reasons relating to the employee and, in the event of a transfer, the vacation must be granted and taken no later than 31 March of the following calendar year. The defendant refused to compensate for these additional 101 vacation days and argued that it could not have been aware of and complied with the notice and request obligations cited by the plaintiff because the case law of the BAG in this regard only changed after the termination of the employment. Insofar as the vacation claims originated from periods prior to 2015, they were time-barred. The plaintiff then asserted the claim to compensation for vacation in the amount of 76 vacation days before the labor court.

The BAG allowed the action and stated that the plaintiff's vacation claims from the terminated employment had neither expired nor become time-barred. According to its recent case law (including judgment 19 February 2019, 9 AZR 423/16), the entitlement to the statutory minimum vacation is not subject to the limitation period pursuant to Sec. 7 (3) BUrlG if the employer has not previously enabled the employee to take the vacation. In the present case, the defendant had not informed the plaintiff of the limited entitlement and had not requested her to take the vacation in order to avoid a forfeiture. In this respect, the defendant had not fulfilled its obligations to cooperate. If the vacation regulations in the employment contract do not contain a differentiation between the statutory minimum vacation and the additional contractual vacation, this also applies to the additional vacation. The BAG rejected the objection of the defendant that he had not been aware of his obligations to cooperate and had enjoyed protection of legitimate expectations in view of the case law on these obligations to cooperate which was only recognized by the BAG in 2019, with reference to the vacation case law of the European Court of Justice (ECJ), which had already recognized in its decision of 6 November 2008 that the provisions of Directive 2003/88/EC - on which the statutory provisions of the BUrlG are based - preclude, without any time limit, a national provision according to which an entitlement to paid annual leave becomes time-barred after the expiry of a period of three years, provided that the limitation period begins to run before the employee has actually been enabled by the employer to exercise this entitlement. Nor does this interpretation conflict with the purpose of the statute of limitations. Both the public interest in legal certainty and the employer's interest in protecting itself against a claim (after the expiry of the regular limitation period of three years) must, according to an interpretation in conformity with EU law, take second place to the objective of protecting health. In particular, the employer can ensure legal certainty by fulfilling his obligations to the employee.

Consequences for practice

The decision fits in with the more recent case law of the BAG on the comprehensive obligations of the employer to cooperate in the implementation of the vacation entitlements of its employees and also clarifies this with regard to the start of the three-year limitation period for vacation entitlements - the limitation period in this respect only starts at the end of the year in which the employer has informed the employee of his specific vacation entitlement and the expiry periods and the employee has voluntarily not taken the vacation. The decision of the BAG is thus in line with the interpretation of Art. 7 of Directive 2003/88/EC by the ECJ, according to which this applies for an unlimited period of time and a limitation in time is rejected. The effects of this case law on the possible assertion of - statutory - residual vacation claims from terminated employment relationships of former employees for whom the employer has not fulfilled the obligations to cooperate remain to be seen.

Employers should - once again - take this decision as an opportunity to readjust their own processes for informing their employees about (remaining) vacation entitlements in the respective calendar year in order to fulfill their obligations to cooperate and thus to be able to affect an effective forfeiture of vacation entitlements not taken by the employee.

3. Consideration of pension proximity in social selection in the context of dismissals for operational reasons (BAG judgment dated 8 December 2022, 6 AZR 31/22)

In the event of termination for operational reasons, the employee to be terminated must be selected on the basis of the criteria set out in Sec. 1 (3) Sentence 1 of the German Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) or Sec. 125 (1) Sentence 1 No. 2 of the German Insolvancy Code (Insolvenzordnung, InsO). In this so-called "social selection", the employer must select the employees to be terminated according to four basic data, namely length of service, age, maintenance obligations and severe disability of the employee. If the employer does not or not sufficiently take these social aspects into account when making the selection decision, an ordinary termination is not socially justified despite the existence of urgent operational requirements.

In its judgment of 8 December 2022 (6 AZR 31/22), the BAG decided for the first time that the weighting of age could take into account the fact that the employee is already drawing an (early) retirement pension without deductions. The same applies if the employee is close to retirement age because he or she can draw such a pension without deductions or the standard old-age pension within two years at the latest after the intended end of the employment relationship. Only an old-age pension for severely disabled persons may not be taken into account in this respect.

In the facts underlying the decision, the plaintiff, born in 1957, had been employed by her then employer, H-GmbH, since 1972. As of 1 December 2020, the plaintiff was eligible for an old-age pension.

In 2020, insolvency proceedings were opened against the assets of H-GmbH and the defendant was appointed as its insolvency administrator. The latter concluded an initial reconciliation of interests with the works council, including a list of names, which provided for the termination of 61 of the 396 employees. The plaintiff was named in this list of names as the employee to be terminated, so that the defendant insolvency administrator terminated her employment for the first time (for operational reasons) on 30 June 2020. In contrast to the plaintiff, the defendant insolvency administrator considered the termination to be effective because the plaintiff was socially the least worthy of protection in her comparison group. She was the only employee who would be able to draw an old-age pension for particularly long-serving employees (Sec. 38, 236b of Sixth German Social Code (Sozialgesetzbuch VI, SGB VI) from 1 December 2020, i.e. shortly after termination of the employment relationship, and was therefore behind all other comparable employees in terms of social selection.

At the end of June 2020, the defendant insolvency administrator agreed on a second reconciliation of interests with a list of names after renewed negotiations with the works council due to the now intended plant closure. As the plaintiff was also on this list, the defendant terminated her again as a precautionary measure on 29 June 2020. The plaintiff also filed an action for protection against dismissal against this termination.

The Labor Court granted both of the plaintiff's claims for protection against dismissal. The Regional Labor Court dismissed the appeal of the defendant insolvency administrator. The appeal by the defendant insolvency administrator, however, was partially successful before the BAG. The BAG held that the first termination was invalid. However, it ruled that the parties were entitled to take the plaintiff's proximity to the pension into account in the social selection process based on the criterion of "age". The rationale for social selection is to give notice to the employee who is least in need of social protection. The selection criterion "age" is ambivalent: First, the need for social protection increases with increasing age, since older employees typically have poorer chances of placement on the labor market. However, it decreases again if the employee either has a replacement income in the form of an old-age pension without deductions - with the exception of the old-age pension for severely disabled persons (Sec. 37, 236a SGB VI) - within two years at the latest after the end of the employment or already has such an income because he or she receives a pension without deductions due to old age. In this respect, the employer can take the age into account to the disadvantage of the employee, so that he is entitled to a certain scope of assessment in the social selection. The disputed first termination of 27 March 2020 was nevertheless ineffective as a result, as the selection of the plaintiff was made solely based on her proximity to the pension but failed to consider the other selection criteria "length of service" and "maintenance obligations" and was therefore grossly incorrect. Regarding the precautionary second termination of 29 June 2020, however, the defendant's appeal was successful. This termination is effective.

Consequences for practice

In practice, it can be stated that in the context of terminations for operational reasons, the proximity of the employee to the pension can have an effect to the detriment of the employee close to the pension when carrying out the social selection. However, it is important to assess the situation in full and to consider not only age but also the other criteria for social selection when selecting the employee in question.

4. Offer of continued employment by the employer "to avoid default in acceptance" after extraordinary termination without notice includes contradictory conduct on the part of the employer (BAG judgment dated 29 March 2023, 5 AZR 255/22).

In its judgment of 29 March 2023 (5 AZR 255/22), the BAG had the opportunity to further substantiate and continue its case law on the employer's default of acceptance in termination disputes in accordance with Sec. 615 BGB and Sec. 11 KSchG.

In the facts underlying the decision, the plaintiff employee was originally employed by the defendant employer as a "Chief Technology Officer" at a gross monthly remuneration of EUR 5,250.00. On 2 December 2019, the employer declared a termination of employment without notice, offering the plaintiff a job as a software developer for the continuation of the employment at a reduced monthly gross remuneration of EUR 3,750.00. The termination letter also contained the following wording: "In the event that you reject the extraordinary termination (i.e., in the event that you assume an undissolved employment relationship) or in the event that we accept the following offer, we expect you to start work on 5 December 2019 at 12:00 CET at the latest." The plaintiff rejected the offer of change and did not show up for work. The employer then terminated the employment relationship again extraordinarily in a letter dated 14 December 2019. In this context, the employer informed the plaintiff that the plaintiff would be expected to start work "in the event of rejection of this extraordinary termination [...] on 17 December 2019 at 12:00 CET at the latest". The plaintiff did not comply with this request either. He brought an action against both notices of termination and claimed compensation for default in acceptance (pursuant to Sec. 293 et seq. BGB).

In the lawsuit, the defendant justified the notices of termination on grounds of conduct. Specifically, he accused the plaintiff, among other things, of endangering and potentially destroying the "feel-good atmosphere" existing in the company in a way that was detrimental to the business, of having an "urge for excessive attention and recognition", behavior that was "contrary to loyalty and thus reprehensible". He lacked "the ability to compromise" and did not shrink from intentionally harming the defendant. His continued employment was unreasonable for the defendant. The fact that it had only issued a notice of change and not "the required termination notice" did not result from the fact that "the employment was not sufficiently intolerable for an extraordinary termination notice", but the plaintiff was under "the urgent suspicion of provoking the court case in order to receive the profit of months of paid leave for the time of the court case (preferably in a lump sum as severance pay or paid time off)".

In the lawsuit, the defendant refused to grant the default of acceptance wage because the plaintiff could reasonably have been offered the continued employment; by filing a request for provisional continued employment during the lawsuit. The plaintiff on the other hand argued that he could not reasonably be expected to continue working for the defendant even if the defendant made a serious offer. The defendant had unjustifiably accused him of multiple misconduct and disparaged his person in extensive explanations to justify the dismissals. He had also claimed at the time that it would be unreasonable to continue employing the plaintiff and that his conduct in this respect was also contradictory.

The BAG upheld the action, determined that the two terminations were invalid and recognized the compensation claimed by the plaintiff on account of default in acceptance. The default in acceptance had to be recorded in accordance with Sec. 615 p. 1 BGB regarding the invalidity of the notices of termination, without it having been necessary for the plaintiff to make an offer of work in order to show his willingness to perform or to escape an imputation of remuneration maliciously omitted. In the opinion of the BAG, the defendant's request included in each of the termination letters that it expected the plaintiff to start work if the respective extraordinary termination was rejected did not constitute a serious offer of process employment to minimize damages. The offer served solely to avoid payment of the compensation for default of acceptance. Moreover, the rejection of the offer could not lead to the conclusion that the plaintiff was not willing to perform within the meaning of Sec. 297 BGB. The work performance offered in the context of a process employment would have to refer to the work performance in the non-terminated employment relationship and not under maintenance of the notice to minimize the acceptance delay remuneration risk of the employer. Therefore, a refusal of the process employment offered in this constellation could not provide an inference for a lack of will to perform on the part of the plaintiff. The BAG rejected an imputation of maliciously omitted earnings pursuant to Sec. 11 No. 2 KSchG due to the rejection of the defendant's offer of continued employment, arguing that the defendant had acted inconsistently. Due to the accusations made against him, the plaintiff could not be expected to continue working for the defendant until the first-instance decision. In addition, the mere rejection of the offered employment in court does not in itself allow the conclusion that the plaintiff was unwilling to perform; in order to indicate such unwillingness, further circumstances must be present, such as the fact that the employee was already unwilling to perform before the invalid employer's notice of termination was issued. In this context, the BAG abandons its previous case law (including its judgment of 17 August 2011, 5 AZR 251/10), according to which the mere rejection of the offered employment in court in accordance with the previous terms of the employment contract could already render the default of acceptance null and void. The plaintiff's application for provisional continued employment in the unfair dismissal proceedings was aimed at trial employment after (at least first instance) determination of the invalidity of the dismissals, so that the plaintiff could return to the company "rehabilitated". The BAG thus rejected a claim of bad faith on the part of the plaintiff.

Consequences for practice

The specific facts of the decision superficially suggest a decision in an individual case without any generalized added value for practice. A more intensive analysis of the judgment comes to the conclusion that in this judgment the BAG has materially increased the requirements for the assumption of a lack of will to perform in the case of a refusal of employment in court for the denial of the employer's default of acceptance with regard to the acceptance of the employee's work performance, according to which the mere refusal of employment in court cannot in itself constitute a decisive indication of the lack of will to perform. In this respect, the constellation on which the decision is based shows that employers cannot generally dispose of the risk of default in acceptance without undermining or at least jeopardizing the argumentative force for an unreasonableness of continued employment by offering a litigation employment relationship. Employers must therefore carefully consider for the concrete design of the litigation employment whether they want to carry it out amicably or - in the event that the employee prevails in the concrete court instance - exclusively to avoid compulsory enforcement; and also carefully document the concrete course of action (in particular with regard to the relevant (re)action of the employee). In order to offset maliciously omitted earnings and to reduce the risk of default of acceptance, the terminated employee may be given priority in this regard to open vacancies without jeopardizing the justification of the unreasonableness of continued employment or exposing himself to contradictory conduct (see only BAG judgment 16.05.2022, 9 AZR 203/99).

5. No forfeiture of vacation entitlements in the event of incapacity for work during the work phase in the case of partial retirement (ECJ, judgment of 27 April 2023, Rs C 192/22)

In April 2023, the European Court of Justice (ECJ) dealt with the question whether it is compatible with EU law that the entitlement to paid annual leave of an employee who moves from the working phase to the release phase of a partial retirement employment relationship during the course of the leave year, which has not been fulfilled to date due to incapacity for work, expires at the end of the leave year or a legally defined carryover period.

The plaintiff employee was employed by the defendant employer until 30 September 2019. He has been in retirement since 1 October 2019. At the end of 2012, the employee and the employer concluded an agreement on partial retirement in the form of the block model. According to this agreement, the employee was to work from 1 February 2013 to 31 May 2016 (work phase) and then be released from work from 1 June 2016 to 30 September 2019 (release phase). Shortly before the end of the work phase, the plaintiff took his outstanding vacation for the 2016 calendar year. However, due to an illness of the plaintiff during the vacation, 2 2/3 of the statutory vacation days remained when he entered the release phase. The employer refused to compensate financially for these vacation days.

In 2019, the plaintiff brought an action before the Labor Court against the employer for financial compensation for the vacation days he had not taken. He had not been able to take all of his vacation due to his inability to work at the end of the work phase. Due to the release from work obligations in the release phase of partial retirement, it was also impossible for him to take his vacation at a later date. The Labor Court dismissed the action because the vacation not taken by the plaintiff during his work phase expired at the end of March 31, 2017, in accordance with the provisions of Sec. 7 (3) BUrlG.

Following an unsuccessful appeal, the plaintiff filed an appeal with the BAG. In the present case, the BAG had doubts with regard to the application of the provision of Sec. 7 (3) BUrlG. According to Sec. 7 (3) BUrlG, vacation must be granted and taken in the current calendar year. A transfer of vacation to the next calendar year is only permitted if justified by urgent operational reasons or reasons relating to the employee. In the event of a carryover, the leave must be granted and taken in the first three months of the following calendar year.

The BAG Court therefore suspended the lawsuit and asked the ECJ for a preliminary judgment. It was to be clarified whether Art. 7 of Directive 2003/88 (Working Time Directive) or Art. 31 (2) of the Charter of Fundamental Rights of the European Union preclude a national provision according to which the entitlement to paid annual leave acquired in the work phase of a partial retirement relationship and not fulfilled by the start of the release phase expires at the end of the leave year or a fixed carryover period.

The ECJ has ruled that both the entitlement to paid annual leave and the entitlement to financial compensation for unfulfilled leave entitlements continue to exist even if the employee was prevented from taking his entitlement to paid annual leave in good time before entering the release phase due to short-term incapacity to work during the work phase of a partial retirement relationship.

The entitlement of every employee to paid annual leave is expressly enshrined as a fundamental principle of EU social law in Art. 31 (2) of the Charter of Fundamental Rights of the European Union. This fundamental right also includes the right to financial compensation for annual leave not taken at the end of the employment. Art. 7 of the Working Time Directive reflects these fundamental rights enshrined in Art. 31(2) of the Charter of Fundamental Rights of the European Union and gives them concrete form. National derogations from the Union regulation provided for by the Working Time Directive must therefore be interpreted in such a way that their scope is limited to what is strictly necessary to safeguard the interests whose protection they allow.

According to the ECJ, the circumstances at issue in the main proceedings cannot justify a derogation from the principle established in Art. 7 of the Working Time Directive, according to which an entitlement to paid annual leave cannot be extinguished at the end of the reference period or of a carryover period established by national law if the worker was unable to take his leave.

To deny an employee who is prevented by an unforeseen circumstance - such as illness - from exercising his or her right to be paid annual leave before the end of the employment relationship any entitlement to financial compensation would be tantamount to violating the principle of equal treatment laid down in Art. 7 of the Working Time Directive in conjunction with Art. 31 (2) of the Charter. Art. 31 (2) of the Charter of Fundamental Rights of the European Union. According to the ECJ, in the case of partial retirement relationships, the employer is rather able to exclude or reduce the risk that the employee will not be able to exhaust his vacation entitlement by agreeing with the employee that he will take his vacation in due time.

Consequences for practice

It follows from this decision for employers that in the case of partial retirement agreements that provide for the block model form, they should check in good time before the employee enters the release phase whether the employee still has outstanding vacation to be granted. It is advisable to avoid an excessive accumulation of vacation entitlements in the work phase from the outset in close consultation with the employee. If, due to illness, the employee is unable to take his or her outstanding vacation before entering the release phase, the employer will have to compensate the employee accordingly.

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