A severance settlement is signed: does that settle unused annual leave?

What remained outstanding despite severance pay

A manager was continuously unable to work due to illness in 2023 until his employment ended on 30 April. The parties had already concluded a court settlement on 31 March. It provided for EUR 10,000 gross in severance pay and stated that leave had actually been granted. It also purported to settle further employment claims (Federal Labour Court, 9 AZR 104/24, paras 2 to 7).

The employee subsequently sought payment for seven days of statutory minimum leave. The Court upheld the award of EUR 1,615.11 gross. Only interest started later than the lower courts had ordered: on 1 June rather than 1 May 2023. The amount reflects this individual case and is not a standard payout rate (paras 12 to 15 and 34 to 36).

Why an agreed end date was not enough

Statutory leave is generally intended to provide actual time off for rest. Section 13(1), third sentence, of the German Federal Leave Act protects against excluding those statutory rights through an agreement disadvantageous to the employee. If leave can no longer be granted because employment ends, section 7(4) provides for payment in lieu. What matters is the legal end of employment, not merely the last day actually worked (paras 18 to 24).

In this case employment continued for another month after the settlement. The fact that its end was fixed and illness prevented the employee from taking leave did not make the waiver effective. The general settlement clause did not change that either (paras 23 to 28).

Not every agreement about leave is excluded

The Court distinguishes a waiver from a genuine settlement of disputed facts. Where uncertainty actually exists about facts relevant to the entitlement, the parties may resolve it through mutual concessions. Simply labelling a known outstanding entitlement as settled or already fulfilled is not enough (paras 26 and 27).

There was no such uncertainty here: continuous incapacity for work and the resulting absence of leave taken had been established. The judgment concerns statutory minimum leave. Additional leave under an employment contract or collective agreement must be assessed under its own rules. Nor does the judgment invalidate every termination settlement as a whole.

The position can change after employment has legally ended

The earlier Federal Labour Court judgment of 14 May 2013, 9 AZR 844/11, illustrates the important distinction. That settlement was concluded after the agreed legal end of employment. Its comprehensive settlement clause covered the existing claim for payment in lieu of leave, and the employee’s claim failed (paras 2, 7 and 10 to 16).

The Court distinguished the protected leave entitlement during employment from the monetary claim arising afterwards. The employee must previously have had an actual opportunity to exercise that claim. The 2025 judgment expressly refers to this distinction (9 AZR 104/24, para 17). Signing later is therefore not automatically harmless.

What to check before signing

Our practical assessment: compare two dates, the proposed conclusion of the settlement and the legal end of employment. Then check whether leave was actually taken and which claims a settlement clause is intended to cover. A substantial severance payment does not answer those questions.

Our own simplified example: an employee is asked in November to agree that employment will end at year-end. Her outstanding statutory minimum leave cannot be eliminated simply by stating that all claims are settled. Whether money must later be paid also depends on which leave entitlement still exists when employment ends.

• Collect the employment contract, relevant collective agreement provisions and the complete settlement draft.
• Compare the leave balance, approved leave and periods of illness chronologically.
• Identify statutory minimum leave separately from additional contractual leave.
• Before signing, have the affected payment claims and deadlines assessed.
• If the settlement is already signed, have its wording and timing assessed rather than assuming an entitlement to further payment.