Two conflicting decisions of the Employment Appeal Tribunal last year (Fraser v St George's Mental Health Trust and NHS Leeds v Larner) left employers uncertain as to whether employees on long-term sick leave had to give notice to their employers to enable them to carry over their unused holiday entitlement into the following leave year. The Court of Appeal has now confirmed that holiday untaken because the employee has been off sick will be carried forward automatically into the next leave year.

The relevant legislation is both domestic and European. Article 7 of the European Working Time Directive states that all workers are entitled to a minimum of four weeks' paid annual leave. Under the domestic legislation, the Working Time Regulations 1998 (the WTR), Regulation 13(1) gives workers an entitlement to four weeks' paid annual leave. Under Regulation 13A, enacted in April 2009, workers are given an additional 1.6 weeks' paid leave (a total of 5.6 weeks' paid leave). Regulation 13(9)(a) states that leave 'may only be taken in the leave year in respect of which it is due'. Under Regulation 15(1) a worker may take leave by giving the relevant notice to his or her employer.

In addition, there are a number of important decisions of the Court of Justice of the European Union that are relevant and potentially conflict with the WTR. In Stringer v HMRC the European Court held that workers on sick leave continue to accrue holiday under the WTR. The Court followed this with the decision in the Pereda Madrid Movilidad SA case, in which it held that if an employee is sick during a period of holiday leave the employer should grant the employee a new period of holiday leave. If necessary, the employer should extend the period during which such leave may be taken into a new leave year.

The employee in the latest case to be decided, NHS Leeds v Larner, was off sick for the whole of the leave year from 1st April 2009 to 31st March 2010. She was dismissed on capability grounds on 6th April 2010 whilst still off work sick. Her employer refused to pay her any accrued holiday pay for 2009/10. NHS Leeds' main argument was that in the absence of a request to take holiday or to carry it over into the following leave year, entitlement to holiday lapses at the end of the leave year. The Court of Appeal firmly rejected this proposition.

The Court of Appeal held that on termination of his or her employment, a worker on long-term sick leave was entitled to be paid in lieu for holiday accrued in the previous leave year but untaken due to sickness. The worker did not need to submit a request for holiday or ask to carry forward his or her holiday entitlement to the following year.

The Court found it persuasive that Article 7 did not make any mention of a leave request. In addition, the European cases establish that where a worker is prevented from taking advantage of the protective purposes of annual leave because he or she was sick during the leave year, he or she is entitled to take paid annual leave at a later date, if necessary beyond the end of the leave year. The claimant had not had the opportunity to take paid annual leave as she had been sick for the entirety of the leave year and beyond. None of the European cases required a request to take paid annual leave to be made. References in the Pereda case to carry over requests merely reflected the facts of that case and did not indicate a general principle requiring a request to be made.

The Court then turned to the WTR. It stated that where a worker is on sick leave and is prevented by sickness from taking annual leave it would be inconsistent with the right under Article 7, as interpreted by the European Court in cases such as Stringer and Pereda, to take such leave at a later date, to require the worker to serve a notice under Regulation 15. The Employment Appeal Tribunal decision in Fraser v St George's Mental Health Trust could be distinguished as the employee in that case had returned from sick leave and had the opportunity to request annual leave. The Court of Appeal concluded that NHS Leeds must pay the claimant a payment in lieu of holiday for the year 2009/10.

Action points

As noted in the judgment, not all employment tribunals have been taking a consistent approach to this question but we now have a binding judgment from the Court of Appeal. A worker who is sick for a whole leave year may carry forward the leave accrued to the following leave year and is entitled to be paid in lieu on termination of employment.

But there are still questions remaining including:

What rules apply in relation to the additional 1.6 weeks' holiday under Regulation 13A?

The Working Time Directive simply requires a minimum of four weeks' paid leave. The Court of Appeal did not consider the position of the additional 1.6 weeks' leave provided in the UK by the WTR as it had not been raised by either party in the previous tribunals. But the Court noted that in the recent case of Neidel v Stadt Frankfurt (see the July Employment Bulletin) the European Court limited the employee's claim to the four weeks' leave provided for by the Directive.

Does this ruling apply to private sector employers?

Article 7 of the Directive has direct effect as an NHS Trust is an emanation of the state.

What about private sector employers who are not emanations of the state?

Can the WTR be construed to accord with this decision? The Court of Appeal suggest that they can be so construed and suggest the additional wording required.

In Regulation 13(9)(a), which states that leave 'may only be taken in the leave year in respect of which it is due’ the Court suggest adding the words 'save where the worker was unable or unwilling to take it because he was on sick leave and as a consequence did not exercise his right to annual leave.'

In relation to payment on termination of employment, the Court suggest that Regulation 14 would be read and interpreted to include the following insertion: '(5) Where a worker’s employment is terminated and on the termination date he remains entitled to leave in respect of any previous leave year which carried over under regulation 13(9)(a) because of sick leave, the employer shall make him a payment in lieu equal to the sum due under regulation 16 for the period of untaken leave.'

What legislative changes can we expect?

In May 2011, as part of the Employment Law Review, the Government committed to revise the WTR to ensure conformity with judgments of the European Court and to give some much-needed clarity to this area. As the proposals currently stand the WTR will be amended to allow carry-over of leave but this will be limited to the four weeks' holiday required by the Working Time Directive. The consultation closed on 8th August 2011 but no draft Regulations have yet been forthcoming.

As Lord Justice Mummery said in his judgment in the NHS Leeds v Larner case, 'the law on paid annual leave is not in a completed state, which must be a great disappointment to those hooked on the hopeless quest for completeness.'