Employees on long-term sick continue to accrue holiday which they can take when they finally return to work, says the European Court of Justice (ECJ).

Some basics on holiday entitlement to keep in mind

To understand the implications of the ECJ judgment, here are a few of the basics of holiday pay, as set out in the Working Time Regulations (WTR):

  1. Every worker is entitled to four weeks' annual leave.
  2. Employers cannot pay a worker in lieu of untaken holiday other than on the termination of a contract. Plus, the four weeks' leave can only be taken in the leave year in respect of which it is due. If a worker has not taken his full holiday entitlement during a leave year, it cannot be carried forward and no payment can be made in lieu.
  3. Employers can set the times that workers take their leave or refuse permission for holiday leave provided they give the requisite notice and so long as this does not effectively prevent the worker from taking holiday at all.
  4. Contractual holiday pay goes towards discharging the statutory entitlement under WTR.
  5. For the UK, holidays are going up: since 1 October 2007, the statutory entitlement increased by an additional four days making a total of 24 days rising on 1 April 2009 by a further additional four days making a total of 28 days for a worker working a full working week (entitlement is pro-rated for part-time workers).
  6. Accrual of holiday leave and the actual taking of holiday leave are two different concepts.

Brief recap of the saga so far

Many employers keep employees 'on the books' – technically still employed – on long-term sick leave long after they've exhausted any entitlement to sick pay, statutory or contractual. In those cases, is the worker entitled to receive holiday pay, even though he or she doesn't get sick pay or any other sort of pay and even though they are (obviously) not doing any actual work from which they might need to take a holiday?

No, said the Court of Appeal in 2005: a worker on long-term sick leave is not entitled to take the statutory four weeks' annual leave in a year when they have not been able to attend work due to illness, nor claim payment in lieu on termination. The case then went to the House of Lords, which quickly referred the issue to the ECJ. At the same time a German case was also referred regarding the issue of carrying forward unused holiday leave due to sickness absence. The ECJ has now given its ruling in both these cases.

Judgment of the ECJ

The questions before the ECJ come down to:

Question 1: Can a worker who is absent on sick leave take paid annual leave during the period of sick leave?

The ECJ has stated that a worker who is on long-term sickness leave continues to accrue a right to paid holiday. However, it is up to each Member State to determine rules for the taking of that accrued holiday leave. So, it is lawful to have rules which prevent the taking of or receiving payment for holiday leave during a period when the worker is absent on sick leave. On the other hand, Member States can have rules which allow a worker on sick leave to take paid annual leave during that sick leave. In other words, it is up to the Member State to determine rules on the taking (but not accrual) of annual leave during a period of sickness absence.

Question 2: Can a worker who has been absent on sick leave for all or part of a leave year carry forward their untaken holiday leave when they return to work in a subsequent leave year or claim payment in lieu on termination of the employment relationship?

Member States can have rules that prevent the carry over of unused holiday into a subsequent holiday year provided a worker who has lost their right to take paid annual leave has actually had the opportunity to exercise their right to that leave. So, workers absent on sick leave throughout an entire leave year must be allowed to take their minimum annual leave on their return to work, even if that return only occurs in a subsequent leave year. This is because the worker did not have the opportunity to take annual leave due to illness. The fact that they didn't have any opportunity to do any work in that period either is irrelevant.

It gets better. Suppose after a couple of years' absence the worker resigns or the employer terminates their employment: it follows from the ECJ's decision that they get a payment in lieu of all the holiday they've accrued but haven't taken. As to calculating that payment in lieu, the ECJ states: "the worker's normal remuneration, which is that which must be maintained during the rest period corresponding to the paid annual leave, is decisive." What? Presumably that means their normal salary had they not been off work due to illness? But is that "normal" normal salary or is it, for example, the salary they might be getting under a Permanent Health Insurance scheme?

Anyway, this of course will not mark the end of the saga: the matter will now need to go back to the House of Lords to apply the ECJ decision. The Lords will no doubt overturn much of the Court of Appeal's decision from 2005. However, whether the Lords will overturn the finding that holiday leave cannot be taken when on sick leave is uncertain.

A crucial outstanding question is how the Lords will interpret "normal remuneration, which is that which must be maintained during the rest period". It is the answer to this which will reveal the ultimate financial implications of this decision.

How will this affect employers?

The European Court of Justice's decision is yet another reason to robustly manage sickness absence. Employers will need to factor in increased cost when managing those on long-term sick. Employers should make sure long-term absentees, even if out of sight, are not out of mind.

Partner Jonathan Chamberlain says, "We expect that employers are more likely to dismiss long-term absentees more quickly, knowing the holiday costs that are accruing. An even more radical approach would be for employers to try to reduce generous sick pay entitlements to offset additional holiday cost."

"We eagerly await the next instalment: the House of Lords' decision, when the full financial implications will hopefully be revealed."