Endless vacation? Eight to-dos for employers for trust-based leave.

 Greater flexibility and freedom when organizing leave requires a carefully-worded employment contract.

Endless vacation? Eight to-dos for employers for trust-based leave.

New work is shaping the processes at more and more companies. This involves greater flexibility and freedom for employees. Against this background, HR now faces the challenge of trust-based leave. We examine the opportunities and demonstrate how employers can minimize the risks.

The world of work is changing. On one hand, the digital and green transformation requires companies to be more agile, while also changing job profiles and skill requirements. At the same time, employees expect more personal responsibility, freedom, trust and appreciation from their employer. The summer vacation period is fast approaching. Who does not dream of more freedom to plan their leave when thinking about their daily work back home while sitting beneath palm trees by the sea or standing on mountain peaks? Although it was unimaginable even a short time ago, the concept of trust-based leave is also becoming a focal issue for HR in the age of the battle for talent. This approach is already being exemplified in the startup scene. Which labor law risks need to be considered?

Not defined by law

Trust-based leave lacks a legal definition. Typically, the concept of trust-based leave means that employees decide for themselves when and for how long they want to take paid leave. The only requirement is that the work is completed and the agreed goals are achieved. With this approach, employees clearly demonstrate their trust and appreciation. Ideally, the concept even reduces the administrative overhead involved in handling applications, approvals and the prior coordination within the team.

The contract design makes the difference

However, trust-based leave also involves a number of risks. For example, if a colleague is poorly organized and fails to ensure that their work is completed while they are on leave, this approach can cause conflicts among employees. The same problem arises if employees fail to properly coordinate their leave with other team members. In some cases, an employee may initially take too little leave, and then end up absent for a very long time due to burnout. In addition, employees may demand extensive vacation compensation when they leave the company. HR managers need to carefully prepare the employment contract in order to prevent situations like these, while ensuring that the trust-based leave concept succeeds:

  1. Agree on minimum leave
    Differentiating between minimum leave and additional leave is absolutely essential. As already reported, employees are entitled to at least 20 days of leave when working the standard five-day week in Germany in accordance with Section 3 of the German Federal Leave Act (BUrlG). To ensure that the statutory minimum leave is complied with, the contract needs to clearly state that leave taken will first be counted towards the statutory minimum leave. Documenting the days off is important. An employer can delegate this task to the employees, but still needs to carry out spot checks for supervisory purposes.
  2. Regulate leave expiry
    Employees have to take their (minimum) annual leave by the end of the year. Otherwise, they face the risk of forfeiting their leave pursuant to the German Federal Leave Act. According to the case law of the European Court of Justice, leave does not expire automatically. Instead, employers have to notify employees of the imminent forfeiture of their leave (C-619/16 and C-684/16). The Federal Labor Court has shared this perspective after reaching a landmark decision. However, this information obligation only applies to the statutory minimum leave. This definitely needs to be complied to prevent employees from accumulating minimum leave entitlements. To avoid incurring similar obligations for the trust-based additional leave, contracts need to clearly stipulate that the additional leave always expires at the end of the calendar year. This applies even if the company does not inform the employees thereof, and does not request that the employees take their additional leave.
  3. Include provisions to address termination and outstanding vacation entitlements
    Trust-based leave must be excluded in the employment contract from the time of notice of termination. Otherwise, employers face the risk of employees unilaterally taking leave during the notice period. This could endanger the proper handover. Settling leave entitlements when the employment relationship is terminated represents another potential conflict. Unless stipulated otherwise in a statutory collective bargaining agreement, employment contracts should stipulate that additional trust-based leave is fully excluded from the compensation for leave entitlements. This is even more important as statements by the Advocate General give cause to fear that the European Court of Justice will permit the leave-related information obligations to also apply to the limitation period. This could result in significant claims for compensation from employees with a long-standing employment relationship.
  4. Define the limits
    Although trust-based leave fundamentally permits employees to freely decide when to take leave and for how long, it is important to include contractual provisions enabling the employer to stipulate otherwise if the proper course of operations is threatened. Alternatively, maximum limits can be defined for specific leave periods, such as summer vacations, or minimum staffing levels can be required. Another option is for the company to reserve the right to approve a certain number of vacation days.
  5. Exclusion during probationary period, after illness and parental leave
    Trust-based leave should not be granted before the end of the probationary period. Provisions regulating leave in the event of illness are also advisable. Otherwise, employees could take leave immediately after six weeks of absence due to illness, even though they remain unable to work. In contrast to continued sick leave and the entitlement to sick pay, this would enable employees to ensure that they continue to receive wages indefinitely. Similarly, excluding trust-based leave following employment prohibitions under the Maternity Protection Act or after parental leave is also worth considering.
  6. Link to variable compensation
    Variable compensation offers options for ensuring that the number of vacation days remains within an appropriate range even without implementing an upper limit, while also ensuring that the company’s targets are achieved. Although Section 315 (1) of the German Civil Code (BGB) states that employees must be able to achieve the targets to which the variable remuneration is linked, this does not prevent the company from setting targets which cannot be achieved or are difficult to achieve if the employee exceeds a certain number of vacation days. Conversely, this diminishes the effect of trust-based leave as an incentive. It is important to considering the following as set forth in Sections 307 (1) and 308 No. 4 of the German Civil Code (BGB): Taking trust-based leave may result in targets not being met or not being met in full.
  7. Reserve the right of revocation
    The startup scene and tech companies have had good experiences with the greater freedom and flexibility offered by trust-based leave. As a rule, the concept does not result in employees barely working and instead embracing idleness. Yet, given that misuse cannot be truly ruled out, specifying a time limit on the introduction of trust-based leave is recommendable. Alternatively, a reservation of revocation can be agreed. This would have to be reasonable for the employee and also specifically stipulate the reasons for revocation pursuant to Section 308 No. 4 of the German Civil Code (BGB).
  8. Involve the works council
    Employers can freely decide whether or not to introduce trust-based leave. However, if rules governing the entitlements are specified as described above, this is regarded as establishing general leave principles pursuant to Section 87 (1) No. 5 of the Works Constitution Act (BetrVG) and the works council must be involved.

When properly regulated in employment contracts, employers can benefit from trust-based leave. This concept boosts employers’ attractiveness and employee motivation, especially in the battle for young talents. Ideally, this approach simultaneously reduces the administrative overhead. However, enabling employees to independently arrange their leave is not the ideal approach for every profession. The model rapidly reaches its limits in the case of tightly meshed teams. Situations in which some employees take 50 days of leave while others only take the minimum amount can also poison the atmosphere of the company. With a view towards the employer’s interests, trust-based leave primarily looks like a concept for jobs where variable compensation can serve to ensure that the company’s goals are achieved.