Employees accrue paid statutory holiday during sick leave, even if absent for the whole holiday year. If they are unable to take their full holiday entitlement in the holiday year due to sickness, they must be able to carry it over. They must also be paid in lieu of the carried over entitlement if they remain off sick until termination. National laws can (but are not obliged to) permit holiday to be taken during sick leave.

This reversal of UK law by the European Court of Justice will impose significant additional costs on employers. Some may respond by managing sickness absence more vigorously and reducing contractual entitlements.

The ECJ's ruling applies only to the four weeks' holiday entitlement under EU law and not the additional 0.8 weeks (1.6 weeks from 1 April 2009) under UK law nor any contractual enhancement.

UK law does not currently permit carry over of the four weeks' holiday. It will therefore need amending unless the House of Lords decides it can read in the necessary words (which seems unlikely). Private sector employers can rely on the existing law until amendments are made.

The amendments will need to specify whether payment in lieu on termination should be calculated at the rate of pay applicable at the point of accrual or on the termination date, and whether employers will be able to set off contractual pay or PHI paid during the sick leave period for which the holiday was accrued.

Their Lordships must also determine whether UK law theoretically allows holiday to be taken during sick leave under UK law. (If so, their reasoning is likely to apply equally to the additional 0.8/1.6 weeks' statutory entitlement as to the four weeks.) Hopefully they will also provide guidance on when an employee is to be treated as in fact unable to take holiday during sick leave (and therefore entitled to carry over). Will this only include employees whose employers prohibit holiday during sick leave or who are mentally incapable of serving the necessary notice to take holiday? Or could it also include those who are incapable of a minimum level of rest (eg, because they are undergoing intensive inpatient treatment or have seriously debilitating conditions)?

Once the House of Lords has given its decision, employers should:

  • review employment terms relating to holiday and sickness entitlements. Employers will still be able to provide that additional contractual holiday does not accrue during sick leave, subject to the need to avoid disability discrimination
  • consider allowing requests to take holiday during sick leave and whether changes are needed to contractual sick pay or PHI entitlements to provide that these count towards holiday pay for holiday taken during sickness
  • consider giving notice requiring long-term sick employees to take accrued holiday entitlement in the last few weeks of the holiday year. This will be cheaper than allowing the leave to be carried over and/or paid in lieu if contractual sick pay or PHI can only be set off against salary paid for holiday during sick leave and not that taken subsequently or paid in lieu
  • reflect carried over holiday entitlements in business accounts
  • consider managing sickness more robustly.

Inevitably some employers will also start to consider dismissal for long-term absence at an earlier stage. (Stringer v HMRC, ECJ)