The impact of employee sickness absence on holiday accrual is an issue that has been causing headaches for employers for some time.  Numerous cases have arisen, some requiring a short trip to the Court of Justice of the European Union (CJEU).  The key question was whether or not employees on long-term sickness absence continued to accrue annual leave, followed closely by the question of whether this accrued holiday should be carried over into the subsequent year if the employee has been unable to use it due to sickness.

Since the high profile cases of Stringer and others v HMRC and Pereda v Madrid Movilidad were heard by CJEU in 2009, it is now established that an employee will continue to accrue holidays during sick leave, and is entitled to save those holidays to use upon his/her return to work.  Those decisions, however, left many unanswered questions as to how this would operate in practice.  For example, what happened to accrued but unused leave at the end of the leave year – was it lost, or should it be carried forward to a subsequent year?  If carry over should be permitted, must a request be made by the employee first?

The recent Court of Appeal decision in the case of NHS Leeds v Larner has provided some welcome clarity on these issues, even if the substance of the decision may not be welcomed by employers. 

Mrs Larner, a clerical worker for NHS Leeds, was absent on sick leave from January 2009 until her dismissal in April 2010.  She brought a claim seeking payment for her 2009 holiday entitlement.  NHS Leeds argued that as Mrs Larner made no request during 2009 to take the leave, or carry it forward to the subsequent year, she lost her entitlement to the leave.  Mrs Larner was successful with her claim in both the Employment Tribunal and Employment Appeal Tribunal (“EAT”), each confirming that the entitlement was automatically carried forward, and no request by the employee was necessary.  Meanwhile, a few months later, the EAT came to the opposite conclusion in Fraser v South West London St George's Mental Health Trust and held that a request for carry over was necessary

The Court of Appeal has now addressed this conflict and dismissed NHS Leeds’ appeal, confirming that where employees are prevented from taking their statutory annual leave as a result of being on sick leave, they must be afforded the opportunity of taking it in a subsequent year, regardless of whether the employee has formally requested for this to happen or not: a “use it or lose it” approach should not apply to sick employees.  Whilst technically this position is in conflict with the Working Time Regulations (“WTR”), the Court made it clear that the WTR must be read in such a way as to give effect to these findings, which were based on European law.

The implication of this for employers is potentially significant, as employees are entitled to be paid in lieu of all accrued but unused leave upon termination of their employment.  Employers seeking to dismiss employees on long term sick leave may be liable for pay in lieu of multiple years’ worth of accrued annual leave.

It may be possible to place limits on this liability.  European cases have confirmed that the carry-over period within which holidays must be taken or otherwise lost can be limited, with a period of 15 months following the end of the leave year being accepted by the ECJ (but nine months being too short).  The UK Government is reviewing the WTR and clearer rules, including a limitation on the carry over period, may feature in amended Regulations in due course.  Until then, employers can only rely upon the position under the case law, which is at least a little clearer following the Court of Appeal’s decision, and so the on-going headache of this issue may finally be starting to lift.