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Court of Appeal clarifies the law on holiday pay for sick workers

In the recent decision of NHS Leeds v Larner [2012] EWCA Civ 1034, the Court of Appeal confirmed that workers on sick leave are entitled to carry forward unused statutory holiday entitlement without needing to submit a formal request to do so.

NHS Leeds v Larner

In Larner, the Court of Appeal had to determine the circumstances in which a worker, who had not taken paid annual leave in the relevant leave year because of absence from work on long-term sick leave, was entitled to a payment in lieu.

The answer depended on the interpretation and application of Article 7 of the Working Time Directive, originally 1993/104/EC, now 2003/88/EC (“the Directive”). Article 7 of the Directive provides that:

1. Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and /or practice.

2. The minimum period of annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated.”

The Court of Appeal directed itself that The Working Time Regulations 1998 (“the 1998 Regulations”), which implemented Article 7, must, if it is possible to do so, be interpreted and applied compatibly with it.

The Court of Appeal determined that the Directive allows workers to take annual leave in a subsequent leave year if necessary; it does not require workers to comply with notice provisions, such as those laid out in the UK’s working time regulations, or to make a request to take annual leave, or ask to carry it forward.

6. In the present case, it strictly became unnecessary for the court to interpret the 1998 Regulations so as to be compatible with Article 7; subsequent to the ET and the EAT giving their judgments in the present case, the ECJ determined that Article 7 has direct effect: see Dominguez v Centre Informatique du Centre Ouest Atlantique (Case C-282/10) [2012] IRLR 321. In Larner, both parties accepted that NHS Leeds was an emanation of the state against which the claimant is entitled to enforce directly the rights conferred by Article 7.

Nevertheless, the court determined that it would be possible to interpret the 1998 Regulations so as to be compatible with Article 7; the Regulations could be read in such a way so as to allow for holiday to be carried over into a subsequent leave year in circumstances where workers are unable or unwilling to take the holiday because they are on sick leave.

First, in relation to the carrying forward of unused annual leave, regulation 13(9) would be construed to read as follows: “Leave to which a worker is entitled under this regulation may be taken in installments, but (a) it may only be taken in the leave year in respect of which it is due, 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.”

Secondly, in relation to payment on termination of employment, 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.”

Impact

This is a welcome decision for courts who have had to deal with the relationship between the prohibition against carrying forward leave in the Regulations and the problems which arise when workers are on long-term sick leave and unable to use their holiday entitlement. Most recently, in Fraser v Southwest London St George’s Mental Health Trust UKEAT/0456/10/DA the EAT held that workers are only entitled to holiday pay where they actually exercised their right to take the leave in question.

This decision has in fact preempted the changes that are due to be made by the Government who have proposed to bring forward amendments to the Working Time Regulations to clarify just this point, see its Consultation on Modern Workplaces 2011.

The decision in Larner did not address the issue as to the time period to which the principle of carry forward in the event of sickness applies. However, the ruling of the ECJ in Georg Neidel v Stadt Frankfurt am Main [C-337/10] has confirmed that the requirements of the Working Time Directive do not extend to holiday entitlement over and above the four-week minimum period. The ECJ clarified that the stipulation that workers must be allowed to carry forward leave they are unable to take due to sickness does not override any national law requirements which are applied only to holiday entitlement in excess of the four-week minimum stipulated by the Directive. Member states are therefore free to decide the terms on which any additional leave is granted.

In line with, or more accurately in anticipation of the ECJ case law, the Government proposes that only the core four week entitlement can be carried forward. It had not been planning to extend this right to the additional eight days that workers have been entitled to take since 2007. These extra days are subject to slightly different rules and can currently be carried forward, but only if the employment contract permits this.

Following the decision in Larner, one significant issue remains unresolved: whether a worker should be paid in lieu of all untaken holiday when they leave employment or whether the right to carry forward leave is limited in time. ECJ Case law suggests it is possible to limit the carry forward period, but this point requires further clarity from the UK courts.