As case law develops in this complex area of employment law, Andrew Fishleigh provides an update on the tricky issues relating to holiday allowances and sick pay.

The calculation of an employee’s holiday entitlement and sick pay rights should be straight-forward, but the reality is somewhat different. The statutory legal position is derived from the European Working Time Directive, the UK’s implementation of this under the Working Time Regulations and countless cases which have come before the European Court of Justice and the English Courts.

Entitlement to holiday under each set of regulations is decided on different legal bases. For example, there is no requirement to carry forward holiday entitlement under the European Working Time Directive, but there is under the Working Time Regulations.

Many employers are surprised to learn of the potential liabilities which can accrue during a lengthy period of sick leave for a member of staff, but there are steps which can be taken to alleviate the damage.

Andrew Fishleigh answers a number of the most common questions in this troublesome area of employment law.

What happens where a worker falls sick during a holiday?

He or she is entitled to accrued holiday, and the remainder of their holiday would be taken as sick leave.

What happens where a worker goes sick shortly before he or she is due to take leave?

They have the right to take leave at another time as, according tothe European Court, the main purpose of leave is to allow the worker to take holiday and not to recuperate from illness.

Does holiday entitlement accrue during periods of sickness, when leave is not taken?

Yes, if holiday cannot be taken during sickness it must be allowed later. Workers cannot be forced to take holidays during sick leave and they are allowed to choose to take holidays after they return to work. One of the leading cases,Stringer v HM Revenue & Customs,determinedin the European Court of Justice that workers on sick leave have the right to accrued paid holiday while they are off sick, even if for lengthy periods of a year or more.

Is notice of intended holiday needed by the employee?

No notice is required according to the English Court of Appeal in a case called Larner but this decision conflicts with Working Time Regulations so confusion reigns.

For how long can holiday entitlement during sickness be carried over?

The position is not completely clear, but in the absence of contractual policies or collective agreements, it is likely that there is no limit. In practice, under the Working Time Regulations the entitlement to carry over leave may be limited to 12 months.

Can payments in lieu of holiday be made during employment?

This is not allowed, whether in respect of sick or healthy employees, as the purpose of annual leave is to allow the employee time for relaxation away from work.

Does exhaustion of contractual sick pay or statutory sick pay affect holiday entitlement?

No, the holiday entitlement is stand alone and is not affected by exhaustion of those sickness rights.

What happens on termination of employment?

Whether a worker has accrued holiday entitlement or not, untaken holiday leave must be paid at the normal rate of pay calculated on the basis of 260 working days in the year when holiday could be taken and not 365 days.

What happens in the case of long-term sickness over 12 months?

One area of potentially huge liability is the long term absentee worker who seeks payment of untaken holidays on termination, or one who seeks leave rights on return to work. The decided cases have shown that limitation of liability is possible, by operating a policy or collective agreement which caps the carry over to a period in excess of 12 months. A collective agreement limiting carry over to 15 months was allowed by the court, whereas a period of 9 months (less than the 12 months holiday reference period) was not allowed. Limiting a carry over period to (say) 15 or 18 months will prevent a claim for several years’ accrued holiday rights in a long term illness absence.

Is there an impact on permanent health insurance (PHI)?

A decision of the European Court of Justice inSchultz – Hoff,giving workers on long term sick leave holiday carry over rights, will also affect employers who have PHI policies in place. This is because under the terms of most policies the lump sum holiday accrued pay will not be covered. So where employees are receiving PHI, employers should take legal advice regarding any early termination (but be careful as to potential claims for breach of contract). Again employers should consider the alternative and potentially easier and cheaper option of capping carry over rights under the terms of a company holiday policy.


The law is not satisfactory at present with areas of uncertainty abounding.

The Government has indicated that the Working Time Regulations will be amended but this may take time and wholesale changes to company handbooks and policies are not recommended in the meantime.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.