German Court Clarifies How to Calculate Holiday Pay for Long-Term Sick Employees
Published on 07/30/2026 at 04:51 | Redaktion boerse-global.de
New guidance from Germany’s Federal Labour Court (BAG) has laid out precise rules for employers calculating holiday payouts when long-term sick workers leave a company. Published on July 29, 2026, the framework aims to reduce financial pitfalls for HR departments handling termination cases.
Timing Is Everything: The Exit Date Sets the Rate
A central rule in the updated guidelines states that the value of unused holiday leave must be determined based on the employee’s circumstances at the exact moment the job ends. This follows a BAG ruling from June 3, 2025 (case number 9 AZR 137/24), which last year refined the calculation method for extended illness periods.
Practically speaking, companies cannot fall back on earlier salary levels. Instead, they must use the current wage rate in effect when the worker departs. The guidelines stress that any financial compensation for untaken leave should mirror the contractual conditions that would have applied had the employment continued.
How the Money Factor Works Under German Law
The payout sum is calculated using the “money factor” outlined in Section 11 of the Federal Holiday Act (BUrlG). The base figure is the average earnings an employee received during the 13 weeks immediately before the holiday would have started — or, in payout cases, before the job ended.
A key protective clause prevents illness-related pay cuts from harming the worker. If someone was sick for a prolonged period and received reduced sick pay or sickness benefits, that lower income cannot drag down the average used for holiday compensation. The same rule applies to permanent disability or when someone is receiving an incapacity pension — periods of unavoidable absence must be treated neutrally. This aligns with a previous BAG decision from April 16, 2024 (9 AZR 165/23), which confirmed that sick leave should not skew the reference earnings calculation.
A Worked Example: 20 Days at €18 an Hour
To show how the rules apply, the guidance includes a concrete scenario. Imagine an employee leaves their job with 20 unused holiday days. They work 8 hours daily at an agreed hourly rate of €18.
The calculation runs like this: 20 remaining days multiplied by 8 hours equals 160 hours to be compensated. At €18 per hour, that comes to a gross holiday payout of €2,880.
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This amount must be paid regardless of whether the employee actually worked during the 13-week reference period or received continued wage payments while sick. The guidelines reinforce the principle that holiday entitlement serves as a genuine substitute for time off — and must be fully financially secured when the employment ends before the leave can be taken.
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