In the case NHS Leeds v Larner Larner had been employed to work at NHS Leeds for 20 hours per week and her terms and conditions stated that she would accrue annual leave during sick leave but that it could only be carried over in exceptional circumstances.
The leave year ran from 1 April to 31 March. Larner went off sick on 5 January 2009 and on 6 April 2010 NHS Leeds dismissed her and informed her that "a payment in lieu of notice and any outstanding leave will be made to you".
Larner brought an employment tribunal claim for unpaid holiday pay under the Working time Regulations 1998 because NHS Leeds hadn't paid for holiday leave that had accrued in the 1 April 2009 to 31 March 2010 holiday year. NHS Leeds argued that as no holiday requests were made, and the employee did not ask to carry the leave forward, the annual leave was lost at the end of the 2009/2010 holiday year. It therefore did not have an obligation to "buy out" that leave at the end of Mrs Larner's employment, as would usually be the case.
However, the Court of Appeal has found that Larner was entitled to be paid for the annual leave, which she had no opportunity to take because of her illness, even though she never actually requested any specific holiday. The holiday carried forward to the next leave year automatically.
The decision resolves a conflict between two decisions of the Employment Appeal Tribunal (EAT) in 2011. The EAT decided in Larner that the entitlement to be paid for accrued but untaken leave from an earlier leave year is not dependent on the employee having to submit a request for the leave before the end of the relevant leave year. However, a later decision in Fraser v South West London St George's Mental Health Trust found that an employee could only carry leave forward if he or she asked to do so. The Court of Appeal has now confirmed the approach taken by the EAT in Larner.
Chris Wellham, Of Counsel in the employment team at Hogan Lovells, said: "Allowing long-term sick employees to carry leave forward automatically and to be paid for all the leave that has accrued on termination of employment could be very costly for employers. This opens the way for employees on long term sickness absence to claim holiday pay for the whole period of their absence when their employment terminates. For an employee who has been absent for two leave years for example, this could represent nearly three months' pay.
"A number of ECJ cases make it clear that legislation can limit the period for which carry-over is permitted. Although the Modern Workplaces consultation that took place last year suggested that the Working Time Regulations could be amended to introduce a limit, we are still waiting for the outcome of that consultation. Clarification of this aspect of the Regulations would be a good fit with the Government's desire to reduce burdensome regulation and costs for businesses."
Kate Hodgkiss, partner in DLA Piper's employment group added: "Employers have been wrestling with the impact of sick leave on holiday entitlement for some considerable time. The headaches for employers have been caused by a number of ECJ judgments which directly conflict with the provisions of the UK's Working Time Regulations 1998 (WTR). The stand-off between ECJ case law and UK legislation has led, in turn, to conflicting decisions in the UK courts.
"Today's judgment from the Court of Appeal on the NHS vs. Larner case clarifies this issue and confirms that employees do accrue holiday while on sick leave. If employees are prevented from taking that holiday because they are sick they can carry it forward. Importantly they do not have to make any request to do so and employees who are unable to take their carried-forward holiday before their employment terminates are entitled to be paid in lieu of it. The court has made it clear that the WTR must be read in such a way as to give effect to these findings.
"Employers must now start to think about how they can manage these issues in practice. This will include reviewing contracts of employment and policies and procedures to minimise holiday liabilities as much as possible. Employers should consider, for example, tightening up the drafting of their employment documents to make it clear that carry-forward applies only to statutory holiday (possibly restricting this to four weeks) and not any enhanced contractual holiday. Employers should also have clear provisions stipulating that statutory holiday will be deemed to be taken first so that if any holiday has already been taken by an employee they will have less to carry over in the event that they are unable to take all their holiday at a future date because of sickness.
"As part of its "Modern Workplaces" consultation, the Government is considering amending the WTR to make the law clearer and to resolve the current conflicts with the case law. A response to this consultation is awaited but Larner will surely lend support to the case for detailed amendments to the WTR in relation to carry forward of leave."