The saga of whether Irish employees are entitled to accrue annual leave during sick leave has finally come to an end. Over the August Bank Holiday, the Minister for Business and Employment formally announced that, from 1 August 2015, Irish workers will be able to carry over such accrued leave for a period of 15 months after the leave year in question.

The apparent inconsistency between Ireland's legislation, in particular the Organisation of Working Time Act 1997 (the "OWT Act"), and the European Union Directive 2003/88/EC (the "Directive") has now been resolved with far-reaching consequences for Irish employers. Here we look at some of the case-law highlights that have shaped this debate, which has been ongoing since the first Court of Justice of the European Union ("CJEU") decisions on this issue almost a decade ago, and offer some practical guidance for Irish employers on implementing this important legislative change.

What's been happening in Europe?

The key issues here are interconnected and twofold: first, the distinction to be made between the purpose of annual leave and sick leave respectively and, second, the apparent inconsistency of certain sections of the OWT Act with the Directive.

In the case of Pereda v Madrid Movilidad SA (C-277/08), the CJEU found that the purpose of paid annual leave is for workers to rest and relax, whereas the purpose of sick leave is for workers to recover from an illness. It is this fundamental distinction that was initially examined in the seminal cases of Stringer (C-520/06) and Schultz-Hoff (C-350/06). Here it was held that "a worker, even if absent on sick leave, preserves their rights to their annual leave entitlement". In other cases the CJEU has held that workers' sick leave cannot act as an allowance in lieu of annual leave.

It is important to note, however, that the Directive does not provide for a carte blanche to the indefinite accrual of annual leave. In the case of KHS AG v Schulte (C-214/10), the CJEU confirmed that allowing unlimited accumulation of annual leave would not reflect the "actual purpose" of the right to paid annual leave and found that national provisions limiting the carry-over period to 15 months on the expiry of the current leave year were not precluded by the Directive.

What did this mean for Ireland?

Until the start of this month, the OWT Act (which implements the Directive) required a minimum number of hours to be worked by an employee to be entitled to a minimum annual leave and did not provide for the accrual of annual leave during periods of sickness absence. The question to be answered - is Ireland required to interpret its national law in accordance with EU law?

Article 7(1) of the Directive requires EU Member States to ensure that every worker is entitled to paid annual leave of at least four weeks. The CJEU, in Schultz-Hoff, went one step further to require that Article 7 cannot be subject to a national precondition that requires the employee to have actually worked during the leave year, so as to be entitled to paid annual leave. More recently, inGarcia v Centros Comerciales Carrefour SA (C-194/12), the CJEU went a step further again, finding that Article 7 precludes an interpretation of national law which denies a worker the right to accrue annual leave during sick leave.

In practice to date, the Irish courts have sought to rely on the EU doctrine of direct effect, finding that EU law cannot be applied to private employers but may be applied to public bodies on the basis that they are deemed to be "emanations of the State". In the case of Wall v Tesco (r-109733-wt-11/EOS), a Rights Commissioner found the employer was "entitled to rely on the national law as it is written". More recently the Labour Court, in the case of Sparantus Ltd v Jemiola (DWT 110/2014) explored whether the doctrine of conforming or consistent interpretation (i.e. indirect effect) could be relied on. Referring to the CJEU decision inMarleasing SA (C-106/89) which required national courts to interpret national law in light of the wording and purpose of the Directive "in order to produce the result pursued" by the Directive, the Labour Court found that the doctrine of indirect effect could not be used as a basis for an "against the law" interpretation of the OWT Act.  This approach was adhered to in the 2015 case ofSeclusion Properties Ltd v O'Donovan (DWT 114/2014). In short, Irish private employers could rely on the OWT Act and not allow their employees to continue to accrue annual leave during sick leave.

However, following a complaint to the EU Commission in December 2013, a Letter of Formal Notice to Ireland in July 2014 was issued officially declaring that sections 19 and 20 of the OWT Act are incompatible with the Directive.

What's happening now?

The commencement of section 86 of the Workplace Relations Act 2015 (the "2015 Act"), which amends the OWT Act, on 1 August 2015 finally brings Irish law squarely within the ambit of the Directive and CJEU case-law as to its interpretation. The revised legislation now provides that Irish employees who are absent on certified sick leave are entitled to accrue annual leave and take such leave "within the period of 15 months after the end of that leave year".  Such accrual is limited to the 20 statutory annual leave days and does not entitle an employee to accrue contractual annual leave days over and above this amount (unless otherwise specified by the employer).

Further, in situations of termination of employment, an employer must have regard to the new definition of "relevant period" when calculating an employee's accrued but untaken annual leave entitlement. For example, in a situation where the employee has been absent on certified sick leave and his or her employment is terminated during the final 3 months of the 15 month period referred to above, the revised section 23 of the OWT Act provides that account should be taken of not only the current leave year but also the 2 leave years immediately preceding the current leave year.

From a practical perspective, these significant changes to the OWT Act necessitate a fresh approach to managing long-term sickness absence, being mindful that such employees will be entitled to accrue statutory annual leave (albeit subject to the 15 month time limit). Opportunistic employees may be tempted to exploit this new entitlement, for example, clocking up 20 days annual leave in respect of one leave year before returning to work, taking the 20 days paid leave, and resuming sickness absence while at the same time accruing a fresh entitlement to the new allocation of 20 days paid leave in respect of that second leave year and so forth. While the revised OWT Act seeks to mitigate the risk of such a practice, by requiring appropriate medical certification to be in place before annual leave can accrue, it is now imperative that employers actively manage employees on long-term sickness absence – seeking independent medical assessments and exploring opportunities for reasonable accommodation to facilitate a return to work or a justified exit sooner rather than later.

In terms of any existing claims in respect of accrued annual leave during sick leave, section 8 of the 2015 Act expressly provides that the 2015 Act will not apply to any dispute presented or referred to a Rights Commissioner before the commencement of the 2015 Act (i.e. pre-1 August 2015).  However, employees that are currently out on certified sick leave may now claim an entitlement to accrue statutory leave in respect of their employer's current leave year (e.g. January to December 2015), notwithstanding that the OWT Act is only revised as of 1 August 2015 i.e. from the employees' perspective, they are entitled to accrue up to 20 days annual leave in the current leave year in which they are unable to take annual leave due to a certified sickness absence - and take such accrued leave within 15 months of the end of the current leave year (e.g. up to March 2017). Where accrued leave is not taken within this period, it is lost and employers are not required to pay employees in lieu of this leave (except on termination of employment).

What should you do?

In light of this significant change, we would recommend that Irish employers:

  • Review and update your contract templates and Employee Handbook or Sick Pay and Annual Leave policies to ensure that they are compliant with the revised national law. Be clear in your documentation that the accrual of annual leave applies to statutory leave entitlements only
  • Carry out an assessment or audit of existing staff that are currently absent on long-term sickness absence and ensure that their annual leave entitlements are being calculated correctly
  • Bolster medical certification procedures to ensure that any long-term absence is fully certified by a qualified medical practitioner
  • In situations of termination, be mindful of the new definition of "relevant period" and ensure that employees are paid in respect of all accrued but untaken annual leave up to the date of termination of employment
  • Be aware that employees are not entitled to payment in lieu of accrued statutory leave except in situations of termination of employment