Instead of setting the number of days employees can take as leave each year, in Germany there is a new trend towards offering 'trust-based leave' – where the employee decides how much leave to take. But how can this be reconciled with the law on annual leave and what factors should employers take into account in putting a trust-based system in place?
Trust-based leave as a modern HR tool
A recent trend in the context of new ways of working and 'Labour Law 4.0' is the trust-based leave system. Instead of a fixed number of leave days that are taken by the end of the year at the latest or carried over according to specific rules, employees can decide on the number of leave days they take every year. The motivation of employers is usually primarily to attract and retain employees with a modern and flexible holiday system. In addition, however, it allows employers to avoid the recurring discussions at the turn of the year about reducing or transferring residual unused leave. At first glance, a trust-based leave may seem to conflict with German vacation law. However, disputes can be avoided with well-thought-out contractual provisions.
The benchmark: statutory holiday
Early experiences with the implementation of trust-based leave indicate there is no sudden increase in the number of days of leave taken. Employees do not suddenly take 60 days of leave a year just because they are allowed to. Conversely, there is often a smaller group that takes very little leave, at least in specific years. Against this background, the contractual basis for trust-based leave should include a clarification according to which statutory leave is to be taken or transferred to the following year in any event according to the statutory regulations.
In order to ensure that the statutory holiday entitlement is fulfilled, employment contracts should include a regulation according to which the holiday taken is first offset against statutory holiday (a regulation we recommend in employment agreements anyway but which is crucial for trust-based leave). In this case, once 20 days of leave have been taken in a calendar year, there will be no need to carry over remaining days. Most employees will take these 20 days annually. Further vacation days should not be carried over into the following year: there is no need for this if an unlimited amount of new leave is available each year.
Dealing with special cases
The concept of trust-based leave needs some limits. In particular, in the event of disturbances occurring in the employment relationship, an unrestricted promise of confidential leave can be problematic for the employer. Employers should consider carefully what precautionary provisions are included in the contract. In particular, the following restrictions should be considered:
- Special rules for terminated employment relationships make sense in order to enable a proper handover and, in particular, for long notice periods, to limit leave. For example, a requirement to have leave approved after the notice of termination has been given or the imposition of a duty to ensure proper handover before leaving on holiday could be considered.
- In the event of long-term illness, trust-based leave might mean an employee no longer submitting a sick note but taking indefinite leave instead. Employers could consider restricting the use of leave during or following incapacity for work or making it subject to permission.
- Whether the employer wants to limit the number of days of leave taken at a stretch (e.g. a maximum of one month at a time) is a question of personnel policy. This approach is understandable, but contradicts the principle of trust-based leave. Alternatively, communication may be useful, explaining other solutions that may be available for long-term leave such as sabbaticals or parental leave.
Careful contractual implementation of newly introduced trust-based leave is essential. The change is easiest to implement for existing employment relationships at the turn of the year, but is also possible in the current calendar year. When implementing trust-based leave, the parties should clarify how any residual leave credit will be dealt with.
Finally, in companies with co-determination, the works council's right of co-determination must be respected. In addition to a works agreement, it is advisable to include trust-based leave in individual employment contracts in order to prevent conflicting individual and collective regulations (in which case the employee may usually rely on the provision that is more favourable for him or her).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.