In our last monthly E-Bulletin, we reported that the House of Lords had handed down its judgement in the case of HM Revenue and Customs v Stringer, which concerns the vexed question of statutory holiday entitlement under the Working Time Regulations (WTR) when a worker is or has been absent on long-term sick leave. In this special E-Bulletin we consider the practical implications of the judgment.

Background

The issues in this long-running case were:

  • whether workers on unpaid sick leave can accrue and take paid annual leave under the WTR while they are off sick;
  • whether workers who have been on long term sick leave can claim payments in lieu of unused statutory holiday entitlement when their employment ends;
  • how pay should be calculated in relation to annual leave taken during sick leave or a payment in lieu on termination of employment; and
  • whether a worker can only claim their holiday entitlement under the provisions of the WTR or can take advantage of more generous time limits by claiming unpaid holiday pay as an unlawful deduction from wages.

The House of Lords dealt expressly only with the last point above, holding that an employee can claim unpaid holiday pay as an unlawful deduction from wages. Unfortunately, this leaves several important issues unanswered.

The answers to the questions below relate only to the minimum statutory entitlement under the WTR. Any contractual entitlement over and above the statutory minimum is a matter for agreement as part of the employment contract.

So what does the judgment mean for employers?

Does a worker accrue holiday entitlement when they are on sick leave?

Yes. Even if a worker is off sick for an entire holiday year, they continue to build up their entitlement to paid holiday under the WTR. The statutory minimum entitlement to paid holiday under the WTR is now 28 days a year.

Can a worker choose to take holiday when they are off sick?

Yes. This was not an issue in this case, but EAT has previously held (Kigass Aero Components v Brown) that a worker on sick leave can give notice to their employer to designate four weeks (the minimum entitlement at the time) in any leave year as holiday even though they are on sick leave at the time the holiday is taken.

Given the widespread publicity this case has attracted, employers are likely to see an increase in the number of workers requesting holiday once their sick pay runs out. Subject to any provisions in their contract, a worker who wants to designate some of their absence as holiday must give notice that is twice as long as the amount of holiday they wish to take. An employer can refuse the request, but if the refusal prevents the worker from taking their holiday entitlement in the relevant holiday year and the employer does not allow the worker to carry forward their unused entitlement to the next holiday year (see below), it may face a claim for compensation either during the employment or on termination.

Must a worker who is off sick at the end of the holiday year be allowed to carry over or be paid for unused entitlement?

This is unclear, as the House of Lords did not consider the issue of carrying forward unused holiday entitlement. However, in January 2009 the ECJ decision in this case ruled that, if national legislation prevents a worker from taking holiday due to illness, they must be allowed to take their holiday at a later date.

Public sector workers can rely on the ECJ decision to carry over to the next holiday year unused statutory holiday entitlement that they have not taken because of illness.

The position for private sector employers is not so straightforward and is likely to be the subject of further litigation. The WTR expressly prohibit carry over of any of the 20-day minimum entitlement. The WTR permit (but do not oblige) employers to allow workers to carry over the additional 8 days' statutory entitlement (in force since April 2009) to the next holiday year, provided the agreement is set out in a "relevant agreement" (the contract of employment or a collective or workforce agreement). If no such agreement is in place, the WTR therefore prevent carry over of the full 28 days' statutory entitlement. The WTR also prohibit payment in lieu of any of the statutory holiday entitlement, except on the termination of employment.

For the time being, private sector employers may be able to rely on the WTR to prevent carry over of unused statutory entitlement. However, employers are unlikely to be able to avoid altogether the cost of annual holidays for workers who are on long-term sick leave. If employers do not pro-actively allow workers to take holiday each year while they are on sick leave or to carry over the statutory entitlement to take on their return to work (or be paid in lieu on termination) they are likely to face claims for accrued holiday entitlement during or on the termination of employment.

Can the employer require a worker to take holiday during a period of sickness absence?

Yes. The WTR permit employers to give notice to workers that they must take holiday on particular dates. In addition, employers can use the contract of employment to require workers to take holiday during seasonal shutdowns and on bank or public holidays. A worker on sick leave can be required to take holidays designated by the employer in advance and should be paid their normal pay, even if contractual and statutory sick pay have run out.

It seems unlikely that employers could avoid the additional costs of holiday pay by using the notice provisions of the WTR to require a worker to take their holiday entitlement during any paid sick leave, especially if there was potential for a worker to return to work before the end of the holiday year and therefore use their holiday entitlement in the normal way.  

How much must an employer pay a worker who takes holiday during sick leave?

A worker must be paid their normal remuneration for any statutory holiday that they take during a period of sick leave. This is the case even although they may have exhausted any contractual or statutory sick pay they are entitled to receive.

What if an employee leaves or is dismissed while they are absent due to illness?

The worker will be entitled to be paid in lieu of any outstanding statutory holiday entitlement for the current holiday year at their normal rate of pay. The worker may also be able to claim outstanding holiday for a previous year if the employment has ended within three months of the end of the last holiday year.

What about "back pay" for holidays from previous years?

The House of Lords decision opens the way for workers to claim for previous years' unpaid holiday pay as unlawful deductions from wages if they can show that there has been a series of "deductions" or failures to pay over a number of years and the claim is brought within three months of the last deduction. There is authority to suggest that it may not be necessary for the worker to have requested holiday during or at the end of each holiday year to be able to make such a claim. If the employment has ended more than three months into a new holiday year, however, and the employee receives holiday pay for the current year, this may break the chain of deductions and deny the employee the chance to bring any claim for previous years.

It should be noted that even if a worker cannot claim their unpaid holiday pay in the employment tribunals under the WTR or as an unlawful deduction from wages, they may be able to bring a claim for breach of contract in the civil courts, where the limitation periods are five years in Scotland and six years in England.

What should employers do now?

Employers will be disappointed at the additional costs they will face as a result of this decision. The courts have recognised that the unfortunate outcome may be an increased likelihood that workers on long-term sick leave are dismissed sooner than they might otherwise have been or that they feel pressured into coming back to work before they are fully fit.

Holiday is also an issue in relation to other types of long-term absence, such as maternity leave. The courts have held that employees cannot be required to take holiday while they are on maternity leave (Merino Gomez v Continental Industrias del Caucho). As a result many employers now have in place arrangements whereby employees use up holiday entitlement before they go on maternity leave and/or on their return or, alternatively, are paid in lieu of any outstanding holiday leave for the current year when they go on maternity leave. Although payment in lieu is not strictly permitted under the WTR, if this approach is agreed with a worker, claims are unlikely. Employers should consider similar arrangements in relation to sick leave and holiday.

Unlike maternity leave, however, sick leave is unpredictable, making it harder to mitigate the operational impact and costs. Employers should:

  • decide what approach they want to take to holidays and sick leave and in particular whether they want to allow carry over of unused entitlement, encourage workers to take all their holidays even if they are on sick leave or do nothing and retain the flexibility to deal with questions from workers on a case by case approach until there is clearer guidance from the courts;
  • review their sickness, holiday and absence management policies and procedures and make any necessary changes to reflect their decision. It should be made clear to workers what the policy and practice is. For example, if employers want to rely on the "use it or lose it" provisions of the WTR to prevent carry-over of unused entitlement, they should make it very clear that workers can and should take their holiday entitlement in the relevant holiday year, even if they are on long-term sick leave, in order to defeat any suggestion that they have been prevented by their illness from taking their holiday entitlement;
  • review any policies relating to permanent health insurance. If a worker has to remain in employment to receive benefits under the PHI scheme employers should consider, in the context of the rules of the particular scheme, what terms should be included in the policy relating to accrual and payment of holiday pay while a worker is in receipt of benefits under scheme. Ideally, workers receiving PHI benefits would not be entitled to take holiday or to receive holiday pay in addition to the PHI benefits, but such terms may be subject to challenge following the Stringer decision;
  • if they have not already done so, put in place procedures to ensure that sickness absence is properly managed and that employees are helped to return to work where possible or dismissed when it becomes clear that they cannot return;
  • monitor employees on long-term sick leave and consider requiring them to take outstanding holiday entitlement (if they have not already requested it) when it becomes clear that they will not return to work before the end of the holiday year to prevent accrual of large amounts of untaken holiday;
  • review any terms in workers' contracts that relate to contractual holiday over and above the statutory minimum to ensure, where possible, that the terms limit accrual and payment in relation to long-term absence and that additional costs are limited to those arising out of the minimum statutory entitlement; and
  • be prepared to consider the facts and circumstances of each worker on long-term sick leave on a case by case basis, bearing in mind potential issues of disability discrimination. For example, if carry over is permitted, it may be possible for an employee returning after long-term sick leave to use outstanding holiday entitlement as part of a phased return to work.