Vacation Reserves - a Definition
Often, the vacation entitlement is not fully utilized before the end of the calendar year. In such cases, any remaining vacation days are typically carried over into the following year, but must be taken within the first 3 months of the new year.
To carry over vacation days into the new year, the employer must create a vacation reserve. In other words, all unclaimed vacation days are transferred to the following year for which a reserve must be made within the current year.
Vacation Reserve and Vacation Pay?
The term "vacation pay" should not be confused with a "vacation reserve". Vacation pay refers to the compensation for any unused vacation days when an employment relationship ends. It is regulated in § 7 (4) of the Federal Leave Act (BUrlG), which states:
"If vacation cannot be granted due to the termination of the employment relationship, it must be compensated."
This means that employees receive the monetary value of unused vacation days. In the case of a vacation reserve, this does not relate to a vacation entitlement that can no longer be taken. Instead, the reserve simply records vacation days that are carried over to the following year, with no payment involved.
How to Calculate the Vacation Reserve
The amount of the holiday provision depends on the below factors:
- The employee's salary.
- The number of days of remaining vacation.
The amount of the reserve, therefore, corresponds to the monetary value of the remaining vacation days, and varies for each employee. Two methods can be used for calculating the holiday provision. The choice of method is at the employer's discretion, but once chosen, it must be maintained according to the law (§ 252 (1) No. 6 HGB).
The individual calculation is based on the employee's hourly wage and work schedule. With this method, remaining vacation days are converted into working hours, depending on the employee's work schedule. The hourly wage is calculated before taxes.
After accounting for employer contributions such as social security, the vacation reserve is assigned a financial value. There are online calculators available for this type of calculation.
Here is an example calculation using the individual method
Ayla works as a graphic designer with an annual salary of €45,000. She also receives a yearly bonus of €2,500. In addition, employer contributions to social security and other payroll-related costs need to be considered to calculate the relevant vacation pay.
She works full-time, five days a week. In a year, she works 260 days (5 days x 52 weeks). After subtracting statutory holidays, her working days amount to 250. Ayla has 12 days of remaining vacation.
To calculate the provision, follow these steps:
- €45,000 annual salary before taxes + €2,500 bonus + €5,000 employer contributions to social security = €52,500 relevant vacation pay
- €52,500 relevant vacation pay / 250 working days * 12 remaining vacation days = €2,496
This means, Ayla's employer must create a holiday provision of €2,496. This information must be included in the company's balance sheet.
The average calculation for holiday provisions is performed similarly but not based on individual values. Instead, it involves taking the average values from various segments of employees, based on their work schedules.
The employee groups are usually formed based on their work schedules, with the average vacation pay for each group calculated. In some cases, specific peculiarities within individual segments or different departments necessitate a segment-specific calculation. An example of such peculiarities is the Christmas bonus, which may not be applicable to all employees.
Here is an example calculation for the average method
**Step 1: ** The employer groups three employees into a segment with the following annual salaries.
Segment 1: Katharina: €52,000 Elvana: €49,000 Valentina: €44,000 Total salary = €145,000
Step 2: Next, the employer calculates the average relevant vacation pay for the segment:
- €145,000 (total salary) / 3 (number of employees) = €48,333.30 (average relevant vacation pay)
Step 3: To find the average vacation pay per day, divide the average relevant vacation pay by the number of working days:
- €48,333.30 (average relevant vacation pay) / 250 (days) = €193.30 (average vacation pay per day)
Step 4: Finally, this value is multiplied by the sum of the employees' remaining vacation days. The remaining vacation days might be calculated as follows:
- Katharina: 10 remaining vacation days
- Elvana: 5 remaining vacation days
- Valentina: 7 remaining vacation days
- Total remaining vacation days = 22
- €193.30 (average vacation pay per day) x 22 (total remaining vacation days) = €4,252.60 (holiday provision in the balance sheet for segment 1
The average calculation is less precise than the individual calculation because it is based on average values rather than exact figures. However, it is more straightforward and is often used, particularly in larger companies.
How to Release a Vacation Reserve
Holiday provisions included in the balance sheet must be released when necessary. The method of release may vary depending on the situation:
- If the holiday provision exceeds the amount to be paid, the excess amount should be recorded as another operating income.
- If the holiday provision is less than the amount to be paid, additional operating expenses should be recorded.
- In an ideal scenario, the holiday provision aligns with the amount to be paid, resulting in a neutral outcome for the company.