Work predicament.

you are right in the sence that is you are sick while you are on leave from work you dont have to take the holiday.. (people do it where I work all the time)

I doubt there is anythign stopping you taking the holiday time as sick and still going on holiday...

that is to say if I book 1 week off work, and book 1 week in spain. I can call in sick on the monday of my 'leave' from spain and say I am sick and I am taking my 'leave' as sick..

(I think, judgin from what peopel here do, however the boss aint gonna be happy)
 
If you are worried about your colleagues being slippery just go into work one morning try your best if it is too painful just go home after a couple of hours.
 
I think you will be ok with this, it's a pre-booked holiday. It's not like you have gone off sick and jumped on the first plane is it. I would probably make a token gesture of saying that you asked about cancelling the holiday but you were told that it was non-refundable (which it probably is) and non-transferable so you decided to make the most of it even though you won't be able to do much.
 
Pre-booked holiday will be fine, infact the doctor would probably advise you take it to aid in the recovery.
 
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