The European Court of Justice’s (ECJ) recent decision that workers on long-term sick leave continue to accrue holiday, which can be carried over to the next year, is not the best news for employers in the current climate (Stringer and others v HM Revenue and Customs (C-520/06) and Schultz-Hoff v Deutsche Rentenversicherung Bund (C-350/06)). “This decision has particularly significant cost consequences for companies with employees who are long-term sick or who are receiving permanent health insurance (PHI) benefits,” says Mark Mansell, a partner at Allen & Overy LLP.

The ruling results from references to the ECJ from the UK and German courts about the application of the Working Time Directive (93/104/EC) (the Directive) (www.practicallaw.com/6-380-9425; www.practicallaw.com/3-381-0864). The Directive provides that EU member states must ensure that every worker is entitled to at least four weeks’ paid annual leave, which cannot be replaced by an allowance in lieu, except where the employment relationship has terminated (Article 7(1) and 7(2)). The UK and German implementing provisions (in the UK, the Working Time Regulations 1998 (SI 1998/1833) (WTR)) provide that, with certain exceptions, the leave must be taken in the year when it is due.

This led to the questions of whether, even if he had not performed any work in the relevant holiday year, a worker on long-term sick leave could claim paid annual leave both during, and on termination of, his employment, and whether accrued holiday that could not be taken during the period of sick leave could be carried over to the next year.

The ECJ’s affirmative answer to each of these questions has been greeted with dismay by employers, who may already be stretched by the current economic conditions. The decision could mean, for example, that when a worker who has been off sick for six years recovers or his employment terminates, he is entitled to a 150-day holiday allowance or payment in lieu.

Fraser Younson, a partner at Berwin Leighton Paisner LLP, says: “Few would disagree that employees must be relieved from working for a minimum period on health and safety grounds. But where someone has been absent recuperating for the entire year, it is difficult to see why more rest is needed. The ECJ says that holidays are a “fundamental right”. But the Directive was adopted as a health and safety measure by a qualified majority vote, whereas a fundamental right would have required unanimous adoption. So this measure may have been adopted under false pretences.”

The decision will particularly affect employers who have PHI because, under the terms of most policies, the lump sum accrued holiday pay will not be covered. “Rather than waiting, employers should act early,” says Mansell. “Managing sickness is always important, but this places an even higher premium on pro-active management. Where employees are receiving PHI, the structure of benefits should be reviewed and, if possible, employment terminated if that will not automatically bring the benefit to an end.”

The UK government has yet to respond but it is likely that the WTR may need to be amended to allow the carry-over of annual leave. Younson adds that: “One might hope that when the Directive comes to be considered by the EU Council of Ministers, these issues can be addressed, but do not hold your breath.”