The European Court of Justice has ruled that workers on long term sick leave will not lose their right to holiday pay where they have been unable to take the holiday by virtue of being on sick leave. This decision is very unwelcome to employers as it will increase the cost of both continuing to employ workers on long term sick leave, and also on termination of their employment. Read on to see what we think this means for employers in practice.

Gerhard Schultz-Hoff (C-350/06) v Deutsche Rentenversicherung Bund, and Mrs C. Stringer and Others (C-520/06) v Her Majesty’s Revenue and Customs

The ECJ was asked by the UK and German Courts to rule on issues concerning the right to paid holiday in the case of workers on long term sick leave. In the UK case of Stringer v HM Customs & Excise (fomerly Commissioners of Inland Revenue v Ainsworth), Mrs Stringer and other employees of HM Revenue and Customs, some of who had been dismissed, had been absent on sick leave. One worker argued that she should be entitled to 4 weeks paid holiday for all the time she was on sick leave. The other 3 workers claimed pay in lieu of untaken holiday when their employment was terminated following a period of long term sickness.

In the German case of Schultz-Hoff v Deutsche Rentenversicherung Bund, Mr Schultz-Hoff, was on long term sick leave when his employment was terminated. He brought a claim in the German Courts for paid annual leave not taken in 2004 and 2005.

The ECJ considered both cases together as they raised similar issues. The Court considered the provisions of the Working Time Directive 2003/88/EC and in particular Article 7 which provides that all workers are entitled to at least 4 weeks’ paid annual leave in accordance with the conditions for entitlement to such leave and the granting of it, which are laid down by national law. Article 7 also provides that the minimum period of leave may not be replaced by a payment in lieu of such leave except on termination of employment.

The ECJ decided that a worker cannot be deprived of the right to paid holiday when he or she has not had the opportunity to take it. Therefore a worker who has been absent from work during the whole of a holiday year cannot be denied the right to holiday pay for that year. National legislation may provide that the right to paid annual leave is lost at the end of a leave year provided that the worker has had the opportunity to exercise that right.

The ECJ also said that national legislation may provide that a worker on sick leave cannot take annual leave at the same time. However, the worker must be able to take it at a later date.

What does this mean for employers?

Right to paid holiday whilst on sick leave - It is now clear that a worker is entitled to take paid holiday leave at the same time as sick leave if national law provides for this. It is also clear that workers on sick leave do not lose their right to statutory holiday pay irrespective of the length of the sick leave; instead it will accrue whilst they are absent. The Court of Appeal’s judgment in Ainsworth in 2005 left the question of accrual uncertain but did rule that under UK law, paid holiday leave cannot be taken at the same time as sickness absence. This part of the Court of Appeal’s judgment is therefore likely to be incorrect.

Right to carry over to next holiday year - The Working Time Regulations 1998 (“WTRegs”) which implement the Working Time Directive do not permit carry over of statutory holiday pay from one leave year to the next. However, the ECJ said that a worker’s right to holiday pay cannot be extinguished at the end of the leave year if the worker has not had the chance to take the holiday. Although it is not explicitly stated in the judgment, this undoubtedly means that workers on sick leave can carry over their accrued holiday and take it in the next holiday year if the worker has not been paid for his or her statutory holidays during the year. Note that it will still be permissible for the WTRegs to prevent carry forward of the statutory holiday entitlement of ordinary workers who have had the opportunity to take the holiday (e.g. because they are not off sick).

Right to pay in lieu on termination - On termination of employment, the worker will be entitled to pay in lieu of any untaken holiday pay in circumstances where he has not had the opportunity to take it (such as if they are still off sick when their employment is terminated). A worker who is absent on sick leave for the entire holiday year will therefore be able to carry over his right to paid holiday pay and if he is terminated during the next holiday year, he will be entitled to be paid in lieu of all the holidays not taken (including those carried over). If the worker is absent for part of the holiday year and still on sick leave when the employment terminates, again the worker will be entitled to pay in lieu of the holiday not taken.

What next? - The UK case of Stringer will now return to the House of Lords (HL) for a decision on how the ECJ’s decision applies in the UK with regard to the WTRegs. The HL will have to decide whether the WTRegs allow holiday to be taken during sick leave (as mentioned above, the Court of Appeal in 2005 ruled that it could not) and second, whether the WTRegs are incompatible with EC law because they prohibit carry forward of untaken holidays to the next holiday year. We think it is likely that the HL will overturn the Court of Appeal’s 1995 decision so as to permit workers to take holiday during sick leave. As regards carry forward of untaken holidays to the next holiday year, the position is less clear. The HL may decide that the WTRegs are incompatible with EC law so that they will have to be amended (note that this will not have retrospective effect), but equally the HL may decide this is unnecessary if workers have the opportunity to take holiday leave whilst off sick. A final point to note is that the Directive gives workers an entitlement of 20 days holiday, whereas the statutory minimum under the WTRegs is currently 24 days, increasing to 28 in April this year. Workers may also be entitled to additional holiday on top of this statutory minimum. The HL will only be concerned with the 20 day statutory minimum as it applied to the claimants in this case. It is unclear if the principles laid down by the ECJ apply in the UK only to the 20 day minimum laid down by the Directive, or to the higher statutory minimum laid down by the WTRegs; it remains to be seen if the HL will shed any light on this.

Public v Private sector employers -The ECJ’s decision will now be binding on public authorities so that their workers will immediately be entitled to carry forward unused statutory holiday pay if their absence on sick leave has prevented them from taking it. On termination they will be entitled to pay in lieu of any such untaken accrued holiday pay. The position is less clear for private sector employees because for them, the ECJ’s decision is not directly enforceable. It is best for private sector employers to sit tight, assume for now that the law is as laid down by the Court of Appeal in Ainsworth in 2005 and wait until the HL decides how the ECJ’s decision applies to UK law. Workers in the private sector should bring their claims now and ask the Tribunal for a stay pending the HL ruling. Private sector employers faced with such claims are advised to do the same and request a stay.