In recent years, both UK and European courts have grappled with the increasingly complex interaction between annual leave entitlement and long term sickness absence. Unfortunately, whilst straightforward, definitive answers would be much appreciated by employers and workers alike, the case law in this area is becoming diverse and, regrettably, contradictory. In this article we explore some of the recent decisions and provide guidance on how to approach this awkward area of employment law in practice.

Before breaking down the detail, here’s a quick reminder of the basics. In the UK, statutory holiday rights are governed by the Working Time Regulations 1998 (the “WTR”), which is derived from EU legislation, namely the Working Time Directive (the “Directive”). Under the WTR, employees are entitled to 5.6 weeks of paid leave a year (which equates to 28 days for a full time employee working 5 days per week), which is greater than the 4 week entitlement under the Directive.

  1. Is a worker entitled to accrue annual leave whilst absent due to ill health?

Yes, said the European Court of Justice (“ECJ”) in the case of Stringer & Others v HM Revenue & Customs, Schultz-Hoff v Deutsche Rentenversicherung Bund. A straightforward answer here, confirmed in subsequent EU and UK decisions: sick workers continue to accrue annual leave.

  1. Is a worker on long term sick leave entitled to accrue the full 5.6 weeks’ annual leave under the WTR, or can this be limited to the lesser, 4 week entitlement, in the Directive?

The ECJ recently considered this in the case of Neidel v Stadt Frankfurt am Main and found that, on termination of employment, the Directive entitled a worker who had been on long term sick leave to payment in lieu of 4 weeks’ annual leave. However, the Directive does not require additional payment in lieu of any national annual leave entitlement in excess of the minimum 4 weeks. Perhaps happily for employers, this substantiates the UK Government’s earlier proposals (in May 2011) to amend the WTR in order to clarify that workers on long term sick leave must be entitled to carry over up to 4 weeks’ accrued but untaken holiday entitlement in certain circumstances. It looks increasingly likely that discounting the additional 1.6 weeks’ in the WTR and confining sick workers’ entitlement to 4 weeks’ annual leave will accord with EU law. Employers should therefore bear this limitation in mind when considering the extent of any annual leave entitlement afforded to sick workers and consider whether their contracts should be drafted to reflect this.

  1. Can a worker take annual leave whilst absent due to ill health?

Matters become more complex when we begin to ask when such accrued annual leave can be taken by the sick worker. In Stringer, the ECJ suggested that where workers are prevented from taking annual leave whilst absent, they should be allowed to carry over their untaken leave into the next annual leave period. However, when the case later returned to the House of Lords (HM Revenue & Customs v Stringer & Others), their Lordships found that regulation 13(9) of the WTR expressly prevented statutory holidays from being carried over into the next leave year. Therefore, to circumvent this apparent conflict with the WTR, the House of Lords held that workers on long term sick leave must be entitled to take (and be paid for) any accrued annual leave during their time on sick leave. So, this is certainly one policy option for employers. But, as the next query highlights, it is by no means the only option.

  1. Is the worker entitled to take the annual leave at a later date?

Following a request for annual leave, an employer is (under normal circumstances) entitled to refuse to allow a worker to take such annual leave by serving a counter-notice under regulation 15 of the WTR. However, where the worker is on long term sickness absence, refusing annual leave exposes the employer to a possible breach of the WTR by preventing the worker from taking their entitlement before the end of the relevant leave year. As mentioned above, the ECJ’s decision in Stringer found that, under the Directive, workers who were prevented from taking annual leave should be allowed to carry it over to the next leave year. Yet the House of Lords declared that carry-over was not an option under the WTR. The answer? Unfortunately, this issue remains a contentious one.

In Pereda v Madrid Movilidad SA the ECJ ruled that, where a worker’s prearranged annual leave coincides with a period of sick leave, the Directive requires that they are permitted to exercise their annual leave entitlement at a later date. This means that if an employee does not wish to take their annual leave during their sick leave they must be allowed to take it at a later point, even if this involves carry-over. With this pointed decision in mind, it may be surprising that the national courts’ approach has been far from cohesive. The discrepancy has focussed on the technicality of whether the worker concerned actively requests annual leave during their sick leave. In NHS Leeds v Larner, the Employment Appeal Tribunal (“EAT”) appeared to accept that an employee absent through illness for an entire “leave year” retained their right to enjoy a period of relaxation and leisure (or payment in lieu on dismissal) in the following year, regardless of whether they had made any request for leave during the leave year. However, in a conflicting subsequent decision, the EAT held that an employee on long term sick leave who fails to request to take their annual leave cannot carry over any unused annual leave entitlement to the following leave year (Fraser v South West London St George's Mental Health Trust).

This conflict has recently been addressed by the Court of Appeal in NHS Leeds v Larner. The Court of Appeal confirmed that, when determining entitlement to payment in lieu of annual leave on termination of employment, there was no requirement that a worker on long-term sick leave must have requested their annual leave during the course of the relevant leave year. Therefore, employers should be careful to allow sick workers to carry over unused annual leave entitlement to be taken in a subsequent leave year and, importantly, be paid for the same on termination of employment.

  1. How long can a worker carry over annual leave accrued during sickness absence?

It is easy to see that an indefinite period of carry-over would quickly become financially punitive for an employer and would be equally difficult to justify in the context of the purpose of annual leave, namely providing a worker with a period of rest and relaxation. So what is the time limit? As yet, there is no UK authority on this question but there have been two ECJ judgements (both relating to German law) which do provide some guidance.

In KHS AG v Schulte, the ECJ held that there is a limit to the time period over which a worker can continue to carry forward untaken annual leave. Specifically, in Schulte, a limit of 15 months after the end of the relevant leave year did not infringe the Directive. Conversely in the subsequent case of Neidel, the ECJ held that a limit of 9 months after the end of the relevant leave year was not compatible with the terms of the Directive. The basic position to be drawn from this strand of caselaw is that sick workers should be allowed to carry over unused annual leave entitlement for a period substantially longer than the reference period in which the holiday accrued. When this carry-over period should cease will depend on any collective agreements applicable to an employee’s employment, terms set out in their contract or, perhaps, it may be that we require a national decision to provide clearer guidance on this particular point.

  1. What is the position in relation to a period of annual leave which is disrupted by ill health?

Whilst the decision in Pereda dealt with a scenario where a worker falls sick prior to a period of arranged annual leave, it was unclear what the position was where a worker falls ill whilst already on annual leave. However, this matter has now been addressed in the case of ANGED v Federación de Asociaciones Sindicales and others. In ANGED, the ECJ determined that workers who fall sick whilst on annual leave should be entitled to reschedule the period of leave which coincides with their ill health. This is, again, a decision based on the Directive rather than the WTR, the latter of which does not appear to allow workers to reschedule annual leave in such circumstances. However, until we have the luxury of a determinative national decision in point, employers might prefer to err on the side of caution (and, in so doing, perhaps increase goodwill amongst the workforce) by allowing workers to reschedule their holidays in the unfortunate event of their falling ill during a period of annual leave.

As the above clearly demonstrates, this is a tricky and changeable area of employment law. In short, until we secure further clarification from the national courts and (ultimately) necessary amendments are made to the WTR, a degree of uncertainty will remain in certain areas.