Court Of Appeal Judgment Clarifies Holiday Pay Issue

A recent judgment has shed some much needed light on how employers must deal with payment in lieu of untaken holiday to employees who have been on long term sick leave prior to the termination of their employment. Peter Jones in the Employment Team explains.

The Court of Appeal has decided that employers must pay departing employees in full for up to 4 weeks per year accrued untaken holiday pay if they have been on sick leave prior to the termination of employment, if they have been unwilling or unable to take the 4 weeks holiday during their sick leave. Previously employers were able to argue that holiday must have been requested for it to accrue on a 'use it or lose' basis, but this is no longer the case.

The judgment in NHS Leeds v Larner means that the Working Time Regulations are effectively amended by the Court, so that annual leave may be carried over to a following year "... where a worker [is] unable or unwilling to take [statutory holiday] because [they were] on sick leave and as a consequence did not exercise [their] right to annual leave." Where a worker is entitled to annual leave "in respect of any previous year"... "because of sick leave" when their employment is terminated, they are entitled to be paid in lieu of that "untaken leave".

The narrow issue in the NHS Leeds v Larner case was whether Mrs Larner, who had been off sick for more than a whole leave year, needed to have requested holiday in a previous leave year to be entitled to claim a payment in lieu of untaken holiday for the previous year. The Court's clear response was that the request was not required. This interpretation relied on the Court's view of European Working Time Directive and its effect on an NHS employer (as a public authority) with reference to the European minimum 4 weeks leave, but went further and stated clearly that the judgment affects private employers as well.

What does this mean for employers?

While this judgment might provide employers with some welcome certainty, it opens up the prospect of significant payments to employees whose employment is terminated after long periods of sickness absence. Ironically this might provoke employers into acting more quickly and decisively in terminating employees on longer term sick leave.

The changes also appear to indicate that employers are not entitled to require employees to take periods of annual leave during their sick leave, thereby neutralising the opportunity to solve the problem before it arises. There is also European case law to suggest that employers are entitled to limit their liability for accrual of annual leave, but it is still uncertain what that limit is. Finally, while the judgment deals with the 4 weeks statutory minimum holiday under the European Working Time Directive, what employers should do about the remaining UK statutory requirement of 1.6 weeks in the meantime is unclear.

The Government is proposing to amend the Working Time Regulations in a manner consistent with the Larner judgment, but more information about what the proposed carry over limit is likely to be is now a pressing issue for employers seeking to resolve difficult accrual issue.

For further information on this or any other employment law issue, please contact Peter Jones by emailing Peter or by calling him on 08450 990045, or speak to your usual contact in the Employment Team.

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