Holiday Pay in Lieu – Definition, Calculation & Legal Framework

Holiday pay in lieu (Urlaubsabgeltung) refers to the financial compensation for annual leave days that employees were unable to take before the end of their employment relationship. The entitlement is governed by Section 7(4) of the Federal Holiday Act (Bundesurlaubsgesetz, BUrlG) and arises automatically upon termination of employment — employers have no discretion in the matter. The amount is calculated by multiplying the average daily wage by the number of outstanding leave days to be compensated.

What Is Holiday Pay in Lieu?

Holiday pay in lieu is the monetary payment for leave days that remain outstanding when an employee leaves a company. It substitutes for holiday that can no longer be granted in kind — that is, as actual time off work.

An important distinction applies to residual leave during an ongoing employment relationship: as long as employment continues, the employer is obliged to grant leave. Monetary compensation in lieu of leave is generally not permitted during an active employment relationship. It is only upon termination — whether by notice of dismissal, a mutual termination agreement (Aufhebungsvertrag), or the expiry of a fixed-term contract — that the entitlement to leave converts into a monetary claim.

Legal Basis: Section 7(4) BUrlG

The statutory entitlement to holiday pay in lieu is set out in Section 7(4) of the Federal Holiday Act (BUrlG). In essence, the provision states: if leave cannot be granted in whole or in part due to the termination of the employment relationship, it must be compensated financially.

When Does the Entitlement Arise?

The entitlement to compensation arises as soon as the employment relationship ends and outstanding leave days remain. This applies regardless of whether the notice of termination was given by the employer or the employee. The obligation to pay compensation also applies in cases of summary dismissal (fristlose Kündigung), mutual termination agreements, or the expiry of a fixed-term contract.

No Discretion for Employers

Employers cannot refuse to pay holiday pay in lieu or exclude it through contractual provisions. The entitlement is mandatory and arises by operation of law. Contractual clauses that seek to exclude or limit compensation are void under Section 13 BUrlG insofar as they affect the statutory minimum leave entitlement.

Calculating Holiday Pay in Lieu: Formula and Example

The Formula Step by Step

There is an established formula for calculating holiday pay in lieu, based on the average daily wage:

Formula:

(Gross monthly salary × 3) ÷ 65 × Number of leave days to be compensated

The figure 65 is derived from 13 weeks (= 3 months) multiplied by 5 working days per week. This calculation method is consistent with the case law of the Federal Labour Court (Bundesarbeitsgericht, BAG).

Alternatively, the daily rate can be calculated as follows:

Annual gross salary ÷ Annual working days × Leave days to be compensated

Worked Example with Real Figures

Anna Müller earns €3,000 gross per month and has 5 outstanding leave days at the time of her departure.

Step 1: Calculate quarterly salary: €3,000 × 3 = €9,000
Step 2: Determine daily rate: €9,000 ÷ 65 = €138.46
Step 3: Calculate holiday pay in lieu: €138.46 × 5 = €692.31 gross

This amount is paid out together with the final payslip.

Tax and Social Security Contributions

Holiday pay in lieu is not a tax-free bonus — it is treated in the same way as regular wages. In practice, this means:

• Subject to income tax: The compensation amount is added to the final monthly salary and taxed accordingly.
• Subject to social security contributions: Contributions to statutory pension insurance, health insurance, long-term care insurance, and unemployment insurance all apply.
• No flat-rate taxation available: A more favourable tax treatment or tax exemption is not provided for by law.

Employers should therefore ensure that the compensation is correctly reflected in the payroll and that social security contributions are remitted on time.

Special Cases of Holiday Pay in Lieu

Holiday Pay in Lieu During Sick Leave

Uncertainty frequently arises when employees have been unable to work for an extended period due to illness and subsequently leave the company. The European Court of Justice (ECJ) clarified in its ruling of 20 January 2009 (C-350/06) that holiday entitlements do not automatically lapse due to prolonged incapacity for work. Upon termination of employment, a right to compensation therefore also exists for leave that was not taken due to illness. National regulations generally provide for a 15-month period after the end of the holiday year, after which the entitlement may lapse — provided the employee was genuinely and continuously incapacitated.

Holiday Pay in Lieu During Parental Leave

In principle, a holiday entitlement continues to accrue during parental leave (Elternzeit). However, under Section 17 of the Federal Parental Allowance and Parental Leave Act (BEEG), employers may reduce the leave entitlement by one twelfth for each full calendar month of parental leave, provided this is declared in writing. Leave not taken during parental leave must either be granted after the parental leave period ends or, if the employment relationship terminates, compensated financially.

Holiday Pay in Lieu Upon the Death of an Employee

The ECJ ruled on 6 November 2018 (C-569/16) that the right to holiday pay in lieu is inheritable. If an employee dies, the outstanding entitlement to compensation passes to their heirs, who may assert the claim against the employer.

Holiday Pay in Lieu in the Event of Employer Insolvency

If a company enters insolvency proceedings, holiday pay in lieu is treated as an insolvency creditor claim. Employees must register their claims with the insolvency administrator. A complete loss of the claim is possible in practice if the insolvency estate is insufficient. Claims that arose within the three months prior to the opening of insolvency proceedings may be covered by insolvency benefit (Insolvenzgeld) paid by the Federal Employment Agency.

Limitation Periods and Forfeiture: What HR Professionals Need to Know

ECJ Obligation to Actively Inform Employees

A frequently overlooked point: holiday entitlements lapse at the end of the holiday year (31 December) or the permissible carry-over period (31 March of the following year) only if the employer has proactively and clearly informed the employee in good time that outstanding leave must be taken before year-end. This obligation stems from the ECJ ruling of 6 November 2018 (C-684/16), which the Federal Labour Court applied to German law in its ruling of 19 February 2019 (9 AZR 541/15).

For HR professionals, this means: anyone who fails to actively inform employees about the impending forfeiture of leave risks those entitlements accumulating indefinitely — and being claimed as compensation upon termination.

Limitation Period: 3 Years

The right to holiday pay in lieu is subject to the standard limitation period of three years under Section 195 of the German Civil Code (BGB). The period begins at the end of the year in which the employment relationship ended. The Federal Labour Court clarified in a landmark ruling in 2022 that the three-year limitation period for holiday pay in lieu only begins to run once the employer has fulfilled its duty to inform employees. If that duty has not been met, the limitation period starts correspondingly later.

Frequently Asked Questions About Holiday Pay in Lieu

When is there an entitlement to holiday pay in lieu?

The entitlement arises upon termination of the employment relationship — whether by dismissal (by either the employer or the employee), a mutual termination agreement, or the expiry of a fixed-term contract — provided that outstanding leave days exist at that point which can no longer be granted in kind. There is no entitlement to compensation while the employment relationship is still ongoing.

How is holiday pay in lieu calculated?

The standard formula is: (Gross monthly salary × 3) ÷ 65 × number of leave days to be compensated. The divisor 65 represents the working days in a quarter (13 weeks × 5 days). The result is a gross amount, which is paid out together with the final payslip.

Is holiday pay in lieu subject to tax?

Yes. Holiday pay in lieu is fully subject to income tax and social security contributions. It is added to the final monthly salary and taxed at the employee's personal tax rate. Tax exemption or flat-rate taxation is not available.

What happens to residual leave upon dismissal?

If the remaining leave cannot be taken before the last working day — because the remaining time is too short or because a release from work duties is not possible — the holiday entitlement converts into a monetary claim that must be paid out.

Can holiday pay in lieu be refused or contractually excluded?

No. The entitlement is mandatory under statute and cannot be excluded by employment contract or collective agreement insofar as it concerns the statutory minimum leave (20 days for a five-day working week, pursuant to Section 3 BUrlG). For contractual leave entitlements beyond the statutory minimum, different arrangements may be agreed.

How many days are taken into account for holiday pay in lieu?

All leave days for which an entitlement still exists at the time of termination are compensated. This generally includes the annual leave for the current year (pro rata or in full, depending on the date of termination) as well as any lawfully carried-over residual leave from the previous year.

Can the right to holiday pay in lieu become time-barred?

Yes. The claim is subject to the standard limitation period of three years (Section 195 BGB). The period begins at the end of the calendar year in which the employment relationship ended — but only once the employer has fulfilled its duty to inform employees in accordance with ECJ case law.

Conclusion

Holiday pay in lieu is a mandatory consideration for HR professionals in every case of employment termination. The entitlement arises automatically, cannot be waived, and must be correctly calculated and taxed. Of particular importance is the active duty to inform employees: anyone who fails to notify staff in good time about the impending forfeiture of leave risks allowing holiday entitlements to accumulate — which may then be claimed as compensation upon termination. Careful documentation of leave and a structured offboarding process protect the company from unexpected subsequent claims.

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Sources

• Federal Holiday Act (BUrlG), Section 7(4). Federal Ministry of Justice, 2023. https://www.gesetze-im-internet.de/burlg/__7.html
• Federal Holiday Act (BUrlG), Sections 1, 3, 13. Federal Ministry of Justice, 2023. https://www.gesetze-im-internet.de/burlg/
• ECJ, Judgment of 06.11.2018, C-684/16 — Obligation to actively inform employees before holiday forfeiture. Court of Justice of the European Union, 2018. https://curia.europa.eu/juris/document/document.jsf?docid=207286
• ECJ, Judgment of 06.11.2018, C-569/16 — Inheritability of the right to holiday pay in lieu. Court of Justice of the European Union, 2018. https://curia.europa.eu/juris/document/document.jsf?docid=207262
• ECJ, Judgment of 20.01.2009, C-350/06 — Holiday entitlement during sick leave. Court of Justice of the European Union, 2009.
• BAG, Judgment of 19.02.2019, 9 AZR 541/15 — Implementation of ECJ case law on holiday forfeiture. Federal Labour Court, 2019. https://www.bundesarbeitsgericht.de/entscheidung/9-azr-541-15/
• Federal Ministry of Labour and Social Affairs (BMAS): Annual Leave — Questions and Answers, 2024. https://www.bmas.de/DE/Arbeit/Arbeitsrecht/Urlaub/urlaub.html
• Federal Parental Allowance and Parental Leave Act (BEEG), Section 17. Federal Ministry of Justice. https://www.gesetze-im-internet.de/beeg/__17.html