The ruling states employees must be compensated for annual leave not taken and will be entitled to four weeks' holiday pay each year they are absent from work.
The ruling marks a decision in the long-running case of Stringer and others vs HM Revenue and Customs.
The ECJ decided the UK national courts could decide on the issue so the case has gone to The House of Lords.
Philip Titchmarsh, employment partner at law firm Pinsent Masons, said: "The real impact of today's decision is on the cost to employers of managing long-term sickness cases, Very often employees who are absent on long-term sick leave who have exhausted their entitlement to sick pay ask to take paid holiday.
According to Titchmarsh, the ruling will override employees' contracts of employment and, on termination of employment, employees will be entitled to accrued untaken holiday.
He added: "The House of Lords will now have to decide whether paid holiday, under the Working Time Regulations, can be taken off while sick. They will also have to decide whether holiday pay claims are limited to current year holiday entitlements or whether claims can go back to when the Regulations came into force in 1998."
But Katja Hall, director of HR policy at the Confederation of British Industry (CBI), said: "This is a real blow to firms trying to keep jobs alive during the recession.
"Businesses themselves also suffer when staff take sick leave, and we had hoped that a compromise could have been achieved over unused holiday time.
"Instead, at a time when the economy is struggling, this judgment will ensure that staff are away from the workplace for longer. And it will create a headache for HR departments, who will have to review their policies and contracts."