In a long anticipated decision, the House of Lords has held that workers continue to accrue and are entitled to take statutory annual leave while off long-term sick. They are entitled to be paid in respect of such leave, even where they have exhausted their statutory and contractual sick pay entitlements. Further, workers on long-term sick leave can bring claims for statutory holiday pay under the unlawful deductions from wages provisions of the Employment Rights Act 1996 (ERA), which means that they can, potentially, claim for previous years unpaid holiday entitlement (HM Revenue & Customs v Stringer and others [2009] UKHL 31).

The previous Court of Appeal decision, known as Ainsworth, was overturned by the House of Lords.

Implications

  • This decision will lead to additional costs for employers, as workers on long-term sick leave who have used up their sick pay entitlement will be entitled to request and be paid for their statutory holiday entitlement in the current leave year. Further they should be paid in lieu of this entitlement if their employment ends.
  • Employers must take care not to rush towards dismissals of long-term sick employees to avoid these additional costs. It is important for such absences to continue to be managed well to avoid the risks of claims for unfair dismissal, disability discrimination or depriving an employee of any separate PHI benefit to which they may be entitled. In this regard, if an employee is in receipt of PHI benefit, employers should check with their PHI provider whether the payment of any holiday pay will jeopardise this benefit.
  • Employers with employees who have been off sick for more than one year will need to consider how they address the potential issue of claims for unpaid holiday going back over a number of years.

There are still a number of issues which were not addressed by the House of Lords in its decision, for example:

  • if the right to statutory annual leave is not exercised by the worker during the worker’s sickness absence, do they lose the right to be paid in lieu of that statutory holiday entitlement if their employment is terminated in a subsequent year;
  • if a worker has requested holiday pay whilst on long term sick leave and this has been refused, or not be paid, will he or she be entitled to bring an unlawful deduction from wages claim during employment?

Facts

Stringer concerns a number of conjoined cases where employees were arguing that they were either entitled to:

  1. take a period of paid annual leave during what would otherwise have been an unpaid period of sickness absence; or
  2. receive a payment in lieu of untaken holiday when dismissed following a period of long-term sickness absence.

The employees in these cases had been successful at the Tribunal and EAT. The Court of Appeal disagreed with the Tribunal and EAT on the basis that:  

  1. statutory annual leave could only be taken at a time during which the worker would otherwise be required to work; and
  2.  that there was a single and exclusive remedy for enforcement of holiday under the WTR and that was under the WTR themselves, and not the unlawful deductions from wages provisions in the ERA.

This overturned the previous EAT decisions in:

• Kigass - where it had been held that annual leave entitlement under the WTR continued to accrue during periods of sick leave; employees could designate such leave during their sickness absence and be paid for it even if they had exhausted all contractual and statutory payments; and

• List Design - where it had been held that claims for unpaid holiday could be brought not only under the WTR, but also under the unlawful deductions from wages provisions. The effect of this being that unpaid holiday pay from previous years could be claimed, whereas such claims would be time barred under the WTR.

The Court of Appeal decision was appealed to the House of Lords who referred a number of questions to the ECJ.

In January this year, the ECJ found that:

  • it is a matter of national law as to whether a worker can take annual leave during a period of sickness absence. However, if a worker is prevented from taking annual leave, the worker must be able to take their holiday at a later date, even if the leave year has ended;
  • furthermore, accrued annual leave must be paid in lieu on termination, regardless of whether the employee has been on sick leave for the whole or part of the leave year. This should be at their normal rate of pay, namely the rate they would have received if they had not been absent on sick leave.

In view of the ECJ decision, HMRC no longer pursued its argument on whether statutory annual leave could be taken during a period of sickness absence. The main argument then remained on whether a claim for unpaid holiday pay could be made under the unlawful deduction from wages provisions of the ERA or only under the WTR.

The House of Lords found that a payment in respect of a period of statutory annual leave came within the definition of “wages” in the unlawful deduction from wages provisions found in the ERA. This means that a claim for unpaid holiday can be brought either under the WTR or as an unlawful deduction from wages claim. The WTR have a strict time limit of 3 months from the date of non-payment of holiday pay in which to bring a claim. The unlawful deduction of wages provisions are more generous in that, although there is a 3 month time limit from the deduction within which to bring a claim, it is also possible to claim for all deductions within a “series of deductions” provided the claim is made within 3 months from the last in the series of deductions. As a result, provided a worker brings a claim for unpaid holiday within 3 months they can go back and, potentially, claim for previous years unpaid holiday.