HM Insights

Sick leave and payment in lieu of accrued holidays

The Court of Appeal (CoA) has this week released judgment in the case of NHS Leeds v Larner, a decision that was keenly awaited in order to provide some clarity in the contentious area relating to the treatment of accrued holiday during sick leave.

As acknowledged by the CoA, the facts of the case were simple.  NHS Leeds employed Mrs Larner, who was absent on sick leave for the entire holiday year of 2009/10. During this period, Mrs Larner did not take any of her annual leave entitlement, nor did she request her employer carry it forward to the holiday year 2010/11. Early in this new holiday year, Mrs Larner was dismissed and NHS Leeds refused to pay her for annual leave accrued but untaken in the holiday year 2009/10.

Mrs Larner claimed that, under the Working Time Regulations 1998 (WTR), she was entitled to carry forward her accrued annual leave in 2009/10 to 2010/11 and, on termination of employment, her entitlement was to be paid in lieu of this untaken leave.Both the employment tribunal and the Employment Appeal Tribunal found in favour of Mrs Larner, that she was entitled to the payment in lieu of untaken leave in relation to the holiday year 2009/10.

NHS Leeds appealed to the CoA, arguing, in essence, that as Mrs Larner had not taken nor requested to carry over her 2009/10 annual leave entitlement, her rights in respect of this leave were simply extinguished – it was a case of “use it or lose it”.

Although the case concerned the WTR, as these regulations implemented European law, the CoA was obliged to consider the case in light of a number of recent European Court of Justice (“ECJ”) rulings on the European Working Time Directive. It did so in some detail, noting with some regret that “the unfolding law on paid annual leave is not in a completed state”.

Ultimately, though, the CoA concluded that this exploration of the complexities of the WTR, European legislation and ECJ case law led to one simple, salient question in this appeal – is there a legal requirement that a person on sick leave, who wishes to carry forward an entitlement to paid annual leave to another leave year, should make a request to the employer to do so?  If this was answered in the positive, then Mrs Larner’s case would fail.

The CoA held that there was no such legal requirement. Mrs Larner was sick throughout the duration of the 2009/10 leave year.  She was thus prevented from taking her annual leave entitlement.  This, it was held, meant that Mrs Larner must be able to carry forward this leave entitlement to a period that she was not sick, even if this was to a period beyond the 2009/10 leave year. No European ruling had laid down a principle that an employee must make a request to carry forward the leave in order to establish this right to carry it forward.

As some assistance to the future interpretation of the WTR, the CoA suggested a purposive reading of the WTR going forward. Regulation 13(9) would therefore be construed to read – italicised text showing the change - "Leave to which a worker is entitled under this regulation may be taken in instalments, 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."

There would also be an additional clause added to Regulation 14: "(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." 


After conflicting decisions in the Employment Appeal Tribunal on this matter, employers may welcome the clarity that this decision brings, if not the substance of the decision. The implication for employers is that employees on long term sick leave will have accrued – and will continue to accrue – annual leave during periods of long term sickness absence and this will carry over into ensuing leave years. The financial implications for employers seeking to terminate employees on long term sick leave is clear, given that the entitlement to be paid for this accrued but untaken leave will also be retained by the employee.

There is, however, a potential limitation of liability for this accrued but untaken leave.  Looking once again to Europe for guidance, recent cases have confirmed that a carry over period in which to allow the holidays to be taken or otherwise be lost can be limited. A limitation of the carry over period to nine months after the end of the relevant leave year was held by the ECJ to be incompatible with the Working Time Directive, but a limitation of the carry over period to fifteen months after the end of the relevant leave year was held to be acceptable. 

This case reinforces the need for employers to take positive steps to manage long term sickness absences.  Consideration should also be given to reviewing contracts of employment to ensure that provision is made that only statutory, and not any additional contractual, entitlement to annual leave will carry over in circumstances of long term absence.