Taking leave: the end of 'use it or lose it' holiday policies

The Court of Appeal's decision in NHS Leeds v Larner [2012] EWCA Civ 1034 has brought the issue of the relationship between annual leave and long-term sickness absence back at the forefront of employers' attention.

Recent cases and conflicting provisions of the European Working Time Directive (WTD) and the UK Working Time Regulations (WTR) have generated a certain amount of confusion in the area ?of sickness absence and holiday and created uncertainty for employers and employees alike.

The root of the confusion is the fact that, under the wording of the WTR, carry-over into the next leave year is expressly prohibited. However, this directly conflicts with the ECJ decision in case C-277/08 Pereda v Madrid Movilidad. This case established that, under the WTD, workers can choose to either take holiday during long-term sickness absence or carry it over to the next year.

Since Pereda, Employment Tribunals and the appeal courts have sought to interpret the WTR to allow carry-over of accrued statutory holiday in these circumstances. However, key questions remained unanswered. These include whether workers who are off sick have to request their holiday each year in order to carry it forward, and whether there can be any time-limit on carry-over of holiday.

The decision in Larner now provides us with some certainty by confirming that employers cannot operate a 'use it or lose it' holiday policy for workers on long term sick leave who do not request their holiday.

No more 'use it or lose it'

This 'use it or lose it' approach had been taken by the Employment Appeal Tribunal in Fraser v Southwest London St George's Mental Health Trust [2012] IRLR 100. The EAT had decided that an employee absent through sickness for an entire year was required to either take their holiday that year, or request to carry over that holiday. If they failed to do so before the end of the leave year, their holiday entitlement for that year was lost. This did not sit comfortably with other decisions on this issue.

Mrs Larner had been off work sick for the entire 2009/10 holiday year. She was dismissed by NHS Leeds at the beginning of 2011. Mrs Larner had not made a request during the 2009/10 holiday year to take her accrued holiday or for her holiday to be carried over.
Her employer took the approach advocated in Fraser, and on termination of employment paid her only for holiday accrued during the 2010/11 holiday year. Mrs Larner brought an employment tribunal claim seeking payment of the statutory holiday entitlement for 2009/10 leave year. Her claims succeeded before both the tribunal and the EAT, and her employer then appealed to the Court ?of Appeal.

The Court of Appeal, with Mummery LJ giving the leading judgment, said that the law in this area is 'certain and clear'. This comment may be slightly surprising to those of us who have been struggling to advise our clients on this issue in light of the conflicting caselaw, but the court made the following clear findings:

rs Larner was entitled to paid annual leave in the 2009/10 leave year. This finding was in line with the ECJ's decisions in joined cases C-520/06 Stringer and C-350/06 Schultz-Hoff where it was settled that workers on sick leave continue to accrue statutory holiday.

She was prevented from taking leave because she was sick.

he was entitled to carry untaken annual leave forward to the next leave year in 2010/11 without making a prior request to do so.

ince her employment was terminated before she could take the carried forward leave, she was entitled to be paid on termination for annual leave she had been prevented from taking due to sickness absence.

Mrs Larner was able to bring her a claim directly under the WTD because her employer, the NHS, was an emanation of the state under European Union caselaw against which she could bring a claim to enforce her rights under the directive. However, this decision will affect all employers. The court confirmed that the WTR could be interpreted as being compatible with WTD. This, Mummery LJ suggested, could be achieved by inserting additional wording into the WTR to reflect the court's findings that a worker remained entitled to annual leave if he had been unable to take it because of sickness, and if his employment was terminated while still entitled to such leave, he would receive payment in lieu (see box).

Unanswered questions

The Larner decision confirms that untaken holiday will automatically be carried forward into the next holiday year for those on long-term sick but the court did not specifically address whether this principle applies only to the basic four weeks' leave under the WTD, or to the additional 1.6 weeks' entitlement under the WTR.

The court did, however, refer (without criticism) to the ECJ decision in case C-337/10 Neidel v Stadt Frankfurt am Main. In this case, it was decided that national law could prevent carry-over of any period of domestic leave above and beyond the WTD four-week entitlement.

The implication seems to be that it is permissible for UK employers to treat the additional 1.6 weeks differently to the statutory four-week entitlement. However, it is unfortunate that the court declined to make a domestic ruling on this issue.

The other key issue that remains unanswered by Larner is the period of time for which employees can carry forward untaken holiday. Consider the following scenario '“ a worker fails to take their holiday entitlement for the 2010/11 leave year because he/she has been on long-term sick leave, the individual returns to work in the next leave year and does not request to take the carried'“over leave. What happens to the accrued 2010/11 entitlement? Employers will understandably be concerned that this decision will mean that holiday will be carried over for an indefinite period.

Some reassurance is provided by the recent ECJ decisions in case C-214/10 KHS AG v Schulte and Neidel. These decisions stated that carry-over may be limited to a specific period of time after the end of the leave year, although this period needs to be 'substantially' longer than the reference period to which it relates. The benchmark from these decisions seems to be that 15 months would be permissible, whereas 9 months would be too short.

It was made clear in Larner that once an employee had returned to work following their sickness absence, a request to take carried-over holiday must be made in the usual way. The length of the carry-over period was not a live issue in Larner, as employment terminated in the following leave year. However, although the ECJ decisions suggest a limit on carry-over is permissible, this was not dealt with in the redrafting to the WTR as carried out by the Court of Appeal. The new wording as it stands does not indicate any time limit after which the right to take accrued untaken holiday expires, and so under domestic law the position remains uncertain.

Being open

It is now clear that workers accrue their statutory annual leave while off sick, and this will automatically carry over to the next holiday year if they have not already taken it. Therefore, employers can no longer remain silent on the thorny issue of holidays with a worker on long-term sick leave, in the hope that the worker will not make a request to take or carry over leave and it will be forfeited.

Employment lawyers may want to advise their employer clients to consider highlighting to employees on long-term sick that they may take their holiday during their period of sickness absence. Although employees cannot be compelled to take their holiday at this time, as confirmed in Pereda, it might be an attractive option for some employees - especially those that have exhausted their sick pay entitlement or are on reduced pay.

Employment lawyers should also be reminding their employer clients that if a worker returns to work before the end of a holiday year, then provided that there is enough time remaining before the end of the holiday year, the employer can require them to take some/all of their accrued holidays.

The government's 'Modern Workplaces' consultation is currently considering how to amend the WTR to deal with the issue of holiday and sickness and bring it into line with the WTD and European level decisions. Until such time as the consultation's conclusions are reported, the Larner decision has provided some useful clarification. While it did not expressly deal with whether the principle applies to holiday over and above the basic four weeks' entitlement, it is worth noting that the consultation currently proposes that employers would not be obliged to carry-over the additional 1.6 weeks leave.