Holiday pay and sick leave

In the July 2009 edition of Employment Highlights, we considered the House of Lords’ decision in Stringer and others v HMRC (previously Commissioners of IR v Ainsworth) (case C-520/06) on claims for holiday pay of those on long-term sick leave. In this edition of Employment Highlights, we look at the case law developments in this area since the House of Lords’ decision (which also cover shorter periods of sickness absence) and give employers guidance as to their practical implications.

Legal background

Article 7 of the Working Time Directive (93/104/EC) (the Directive) provides that member states must “ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice”. Payment in lieu of this minimum entitlement is prohibited except on termination of employment.

The Working Time Regulations 1998 (WTR) implement the Directive into UK law. They provide that: a worker is entitled to 5.6 weeks’ annual leave in each leave year (made up of the period of four weeks prescribed by the Directive and an additional period of 1.6 weeks) (regulations 13(1) and 13A); a worker is entitled to be paid in respect of any period of statutory annual leave to which they are entitled at the rate of a week’s pay for each week of leave (regulation 16); statutory annual leave may not be replaced by a payment in lieu, except on termination of employment (regulation 13(9)); on termination of employment, a worker is entitled to a payment in lieu of statutory annual leave accrued but untaken (regulation 14(1)); and a worker is not entitled to carry over any accrued but untaken statutory holiday from one holiday year to the next (except with regard to a worker’s entitlement to the additional 1.6 weeks statutory holiday if a relevant agreement provides that this is the case) (regulations 13(9)(a) and 13A(7)).

The decision in Stringer

The claimants in the Stringer case fell into two categories. The claimant in the first category was absent on indefinite sick leave for several months receiving sick pay. She gave notice to her employer that she wished to take annual leave during that period. The employer refused her request. Those in the second category were employees who had been absent from work on long-term sick leave and whose employment had then been terminated. They claimed payment in respect of accrued but untaken holiday entitlement. The case went all the way to the House of Lords, who referred it to the European Court of Justice (ECJ).

In January 2009 the ECJ ruled in Stringer (and the conjoined German case of Schultz-Hoff v Deutsche Rentenversicherung Bund (C-350/06)) that:

  • a worker on sick leave does accrue holiday despite not working but it is for member states to decide whether a worker can take their annual leave during a period of sick leave or not. (Consequently it is for the UK to decide whether workers on long-term sick leave can take paid holiday during sick leave or have to carry it forward - although under the current provisions of the WTR as drafted, it is not possible to carry forward untaken accrued holiday into the next leave year);
  • at the end of a leave year, a worker on sick leave who has been unable to take holiday (for example, because the member state does not permit it) must be allowed to carry it over; and
  • the right to be paid in lieu of accrued but untaken holiday on termination of employment applies even if a worker has been on sick leave for the whole or part of the leave year.

The law on paid holiday and sick leave following Stringer

The House of Lords’ decision in Stringer clarified a number of issues relating to holiday pay and long-term sick leave but left others unresolved.

What became clear:

  • a worker’s right to paid statutory holiday accrues during a period of sick leave, however long its duration, even if the worker is absent on sick leave for the whole of the leave year;
  • a worker may take statutory paid holiday during a period of sick leave;
  • the WTR do not permit the carry over of statutory holiday; and
  • a worker who takes statutory holiday during sick leave for which he is not paid may bring a claim whilst employed, with time running from the date of the deduction or the last in a series of deductions.

However, one of the issues which remained unresolved after Stringer was whether a carry over exception could be read into the WTR where a worker is absent on sick leave for the entire holiday year and is unable to take statutory holiday during sick leave either because his employer refuses to allow him to do so or because, due to the nature of his illness, he is arguably incapable of serving notice that he wishes to take holiday.

The decision in Pereda

Following the decision in Stringer, the case of Pereda v Madrid Movilidad SA (case C-277/08) came before the ECJ in September 2009 and the Court’s decision gave further guidance on some of the unresolved issues.

The employee in Pereda was instructed by his employer to take holiday from 16 July to 14 August 2007. Shortly before that period commenced, Mr Pereda suffered an injury at work and, as a result, was unfit to work until 13 August 2007. Just over a month later, he asked his employer to treat the absence as sickness absence and to allocate him a new period of paid holiday for that year. The employer refused and Mr Pereda brought proceedings in the Spanish courts which were referred to the ECJ. The Court found in his favour and ruled that a worker who is on sick leave during a period of previously scheduled annual leave has the right, on his request and in order that he may actually use his annual leave, to take that leave during a period which does not coincide with the period of sick leave. The Court stated that this may involve allowing the worker to take leave outside the holiday year in question.

Whilst the Court made it clear that, where necessary, a worker should be allowed to take the holiday leave in the next holiday year, for example where there is not enough time left in the current holiday year to do so, the WTR are quite clear that holiday cannot be carried over in this way (except in the limited circumstances referred to above). Consequently, after Pereda, public sector employees could argue that article 7 of the Working Time Directive is sufficiently precise to have direct effect, allowing them to rely on the ECJ's interpretation of the Directive. However, private sector employees, who would ordinarily have to rely on the WTR, may find that their employers argue against leave being carried forward.

The Department for Business, Innovation and Skills has indicated that there will be a government consultation on possible amendments to the WTR in light of the ECJ’s ruling later this year.

In any event, commentators noted the possibility that tribunals would reinterpret the WTR to give effect to the European law after Pereda, despite the clear wording of the WTR. That is just what has now happened in the Shah case discussed below.

The decision in Shah

In the case of Shah v First West Yorkshire Limited (ET/1809311/2009) reported in February this year, an employment tribunal ruled that statutory holiday leave lost due to illness may be carried over to the next holiday year if there is not sufficient time remaining for it to be taken in the current holiday year.

This is the first employment tribunal case to test the issue of paid holiday and sick leave following the rulings in Stringer and Pereda last year.In the case Mr Shah booked four weeks’ holiday from 22 February to 21 March 2009. The relevant holiday year under his contract of employment ran from 1 April to 31 March. In January 2009 Mr Shah broke his ankle and was off work from 15 January to 18 April 2009. On 4 April he wrote to his employer asking if he could claim back the four weeks' holiday that he had previously booked, which fell within his period of sickness absence.

The company replied more than six weeks later, refusing the request because he had returned to work after the end of the holiday year and therefore any holiday due in respect of the previous holiday year was “lost”. Consequently Mr Shah brought proceedings against his employer.

The employment tribunal found in Mr Shah’s favour and held that it was clear following the ECJ’s decision in Pereda that in order to comply with the Directive, national law must permit an employee who falls sick during a period of annual leave to take that annual leave subsequently, and, if time does not permit that leave to be taken within the current holiday year, to carry over that leave entitlement to the following holiday year.

In reaching this decision, the tribunal interpreted the WTR in line with the Directive by adding to regulation 13(9) which prevents the carrying over of statutory holiday the words which follow in italics:

"Leave to which a worker is entitled under this regulation…may only be taken in the leave year in respect of which it is due save where a worker has been prevented by illness from taking a period of holiday leave, and returns from sick leave, covering that period of holiday leave, with insufficient time to take that holiday leave within the relevant leave year; in which case, they must be given the opportunity of taking that holiday leave in the following leave year".

The tribunal considered that it was entirely consistent with the “underlying thrust” of the WTR to add these words to regulation 13(9) to cover the “limited and special situation” dealt with in Pereda.

What should employers do?

Whilst the decision in Shah is not binding on other tribunals, in light of the incompatibility between Regulation 13(9) and the Directive (as reinforced by Pereda), it seems likely that tribunals will apply this decision. Bearing in mind that the case law impacts the rules governing statutory holiday leave only (it is for employers to decide how to deal with any additional contractual entitlement to holiday), there are various options open to employers:

  • In the hope that Shah is not followed by other tribunals and because the decision in Pereda is not directly enforceable against them, private sector employers may choose to leave their sickness policies unchanged and refuse to comply with any request from workers to take statutory holiday lost due to sickness at a later date. This approach might appear attractive to employers who are worried about potential abuse of a system which allows workers to return from holiday claiming to have been sick for all or some of the time. However, it brings with it the risk of successful claims against the employer if tribunals follow the approach in Shah.
  • Whilst leaving existing policies unchanged, employers may decide to deal with any requests from workers to take statutory holiday lost due to sickness at a later date on a case by case basis. This option would enable employers to agree to the requests of workers whose circumstances are similar to those arising in Pereda and Shah and so avoid potential claims. It would however lead to uncertainty as to how such requests should be dealt with.
  • Employers wishing to follow best practice and to avoid the risk of similar claims to those in Pereda and Shah, may decide to change their policies to allow, where a worker requests it, statutory holiday leave lost due to sickness to be taken during the remainder of the current holiday year on the worker’s return to work or, where there is not sufficient time remaining in the current holiday year on the worker’s return to work, to permit statutory holiday leave lost due to sickness to be carried forward to the next holiday year.

This final option would result in certainty as to how such cases should be dealt with and, in order to guard against abuse of this policy, there is no reason why employers should not make the entitlement subject to the worker’s compliance with the normal sickness notification and certification procedures which apply to all periods of sickness absence in the usual way (perhaps suitably modified to take into account, for example, time differences if the worker is overseas). In any event, abuse of the policy is of course far less likely to occur where workers are entitled only to statutory rather than contractual sick pay. (The low rate of statutory sick pay and the fact that it is not payable for the first three days of sickness absence are unlikely to make the option of substituting sickness absence for paid holiday attractive). However, where contractual sick pay is due, recording and monitoring sickness absence properly will help to identify instances of abuse of the system and workers should be made aware that any abuse could lead to disciplinary action. An employee who contacts his employer annually from the beaches of Barbados with reports of illness is unlikely to get away with this for very long.