Until recently, employers have grappled with two questions: does an employee on sick leave continue to accrue annual leave and can the employee use up paid annual leave when sick pay runs out.

These questions have now been answered by the ECJ in the Stringer judgment (C-350/06). Employees absent on sick leave will continue to accrue the statutory right to paid annual leave. The ECJ also accepted that it was open to Member States to provide in national legislation whether an employee can or cannot take paid annual leave during a period of sick leave but if the employee is prohibited from doing so then he/she must be given an opportunity to take the leave at another time.

It remains to be seen whether the Government will make any changes to the Working Time Regulations 1998 to clarify the point – so far tribunals have adopted the position that employees on sick leave cannot use up annual leave without returning to work.

An employee who has been absent on sick leave in the run-up to employment ending – and therefore is unable to take, but continues to accrue, holiday - will be entitled to a payment in lieu of accrued statutory annual leave on termination.

From an employer’s perspective, this increases the business cost of continuing to employ staff who are absent on long-term sick leave, particularly in light of the extension of the right to paid annual leave to 24 days per year (increasing to 28 days from April 2009). It is likely to prompt earlier resolution of long-term absence. It remains open for an employer to provide that contractual annual leave ceases to accrue during sick leave, although care will need to be taken to avoid indirect discrimination against disabled employees.

Schultz-Hoff v Deutsche Rentenversicherung Bund C350-06, Stringer & Others Her Majesty’s Revenue and Customs C520-06.