Paid holiday entitlement basics
A reminder of a few of the basics of paid holiday entitlement:
- Since October 1998, every worker has had the statutory right to four weeks' paid annual leave under regulation 13 Working Time Regulations 1998 (WTR). Since 1 October 2007, regulation 13A WTR increased the statutory entitlement by an additional 0.8 weeks rising again on 1 April 2009 by a further additional 0.8 weeks making a total of 5.6 weeks (equivalent to 28 days for a worker working 5 days+ a week).
- If a worker has not taken their full holiday entitlement during a leave year, the reg 13 leave cannot be carried over, although it is possible for an employer to agree to the carry over of the reg 13A additional leave. Special considerations apply in relation to workers on maternity leave.
- No monies can be paid to a worker in respect of untaken holiday other than on the termination of a contract. So, employers cannot buy out either the reg 13 or 13A holiday entitlement.
- Where an employer offers contractual holiday leave in excess of 4.8 weeks rising to 5.6 weeks, there is no statutory restrictions as to payment in lieu or carrying forward for leave above the first 5.6 weeks.
- Under regulation 15, workers must give appropriate notice that they intend to take holiday leave. This can be set out in the contract. The default position is that twice as much notice as the period of holiday leave requested must be given.
- Also under regulation 15, employers can set the times that workers take their leave such as bank holidays or annual shutdowns, so long as this does not effectively prevent the worker from taking holiday at all.
- Accrual of holiday leave and the actual taking of holiday leave are two different concepts.
The saga so far...
If you already know the story of how this got to the House of Lords or just want to get to the practical implications, please skip to the section below - what has been answered by the House of Lords? Otherwise, the history is as follows.
Back in February 2002 the Employment Appeal Tribunal (EAT) in Kigass Aero Components Ltd v Brown held that although a worker cannot take a holiday leave and annual leave simultaneously, they are entitled to take whichever right is more favourable, which, if they have run out of sick pay, will be paid annual leave. Accordingly, the entitlement to holiday arose regardless of whether any work had been done during the holiday year.
As a result of the Kigass decision, provided the employee gave appropriate notice that they intended to take holiday leave (under Regulation 15), they were entitled to paid leave even if they had exhausted all their entitlement to sick pay and had not 'worked' at any point in the relevant holiday year.
Shortly after Kigass, the EAT handed down its decisions in List Design Group Ltd v Douglas and Canada Life Ltd v Gray and Farrar.These cases did not relate to workers on sick leave. In Canada Life, the employer wrongly refused to recognise that the individuals were indeed 'workers', claiming instead that they were self-employed contractors and not entitled to holiday pay. In List Design, the employer wrongly claimed that holiday pay was already rolled-up in existing pay rates.
In both cases the workers were able to claim back holiday pay not only for the current, but also preceding holiday years. This was on the basis that non-payment of statutory holiday entitlement amounted to a non-payment of wages under the Employment Rights Act (ERA) 1996. This allowed claims to be brought within three months of the last in a series of deductions in effect allowing claims to be "leapfrogged" back as far as 1 October 1998, the date when the WTR came into force.
Bringing a claim under ERA effectively allowed claimants to circumvent the operation of Regulation 30 of the WTR, which says claims must be brought within three months of the breach. In the Canada Life case this resulted in awards for two workers covering a four-year period amounting to £19,000 and £30,000 respectively.
In Commissioners of Inland Revenue v Ainsworth & others, the Revenue brought a combined appeal regarding a number of similar cases and invited the EAT to overturn its earlier decisions in Kigass and List Design.The EAT declined to do so and instead referred the matter to the Court of Appeal which did in fact overturn both the Kigass and List Design decisions. This was good news for employers as it closed the door on opening up liabilities under the ERA route.
In overturning Kigass, the Court of Appeal held that a worker on long-term sick leave is not entitled to holiday leave in a year when they have not been able to attend for work nor payment in lieu on termination.
In overturning List Design and Canada Life, it stated that the WTR were intended to provide a single and exclusive regime for the enforcement of the statutory rights to annual leave and could not be circumvented by an application of ERA. The result was that claims could only be made under the WTR.
Ainsworth, now under the name of Stringer and ors v HM Revenue and Customs was appealed to the House of Lords who referred the Kigass issue to the European Court of Justice (ECJ). At the same time a German case, Schultz-Hoff v Deutsche Rentenversicherung Bund, was also referred regarding the issue of carrying forward unused holiday leave due to sickness absence.
In January 2009, the ECJ ruled:
- A worker who is on long-term sickness leave continues to accrue a right to paid holiday. However, it is up to each member state to determine rules for the taking of that accrued holiday leave. So, it is lawful to have rules which prevent the taking of holiday during a period when the worker is off sick. On the other hand, member states can have rules which allow a worker to take paid holiday leave while on sick leave.
- Member states can have rules that prevent the carry over of unused holiday into a subsequent holiday year provided that a worker who has lost their right to take paid annual leave has actually had the opportunity to exercise their right to that leave. So, workers absent on sick leave throughout an entire leave year must be allowed to take their minimum annual leave on their return to work, if they were prevented from taking their annual leave due to being on sick leave.
- Likewise, the entitlement to receive a payment in lieu of leave not taken on the termination of employment should also be unaffected by the worker's illness. As to calculating the payment in lieu, the ECJ states "the worker's normal remuneration, which is that which must be maintained during the rest period corresponding to the paid annual leave, is decisive".
The matter then finally went to the House of Lords. Their Lordships overturned the Court of Appeal restoring the EAT decision. So back to Kigass (workers can take holiday leave when on sick leave) and List Design (claims can be brought either under the WTR or as a deduction of wages claim under the ERA).
So we are largely back to the pre-2005 position with several difficult questions unanswered.
What has been answered by the House of Lords?
Are workers on long-term sick leave not only entitled to accrue holiday but also to take paid holiday leave?
Yes. There is nothing in the WTR which expressly prevents a worker from taking paid holiday leave while on sick leave. A worker is entitled to take whichever leave is more favourable. Accordingly, a worker off sick can elect to come off unpaid sick leave to take paid holiday leave and then return to sick leave (Kigass).
Is it permissible to have rules that prevent the carry over of unused holiday into a subsequent holiday year?
Yes. So, as held in Kigass, if the worker does not elect to take their holiday entitlement during a leave year, it cannot be carried forward and no payment can be made in lieu. Their position is the same as that for a worker not on long-term sick leave, provided they have had the opportunity to exercise their right to take paid holiday leave. (See 'outstanding questions' below.)
Can a claim only be brought under the WTR?
No. A worker who has been denied the right to take paid holiday leave can bring their claim under either the WTR or as a deduction from wages claim under the ERA or, as is more likely to be the case if there is any uncertainty, both.
What has been left outstanding?
Is a worker on long-term sick leave entitled to carry forward paid holiday leave into a subsequent leave year?
As for is it possible to carry forward leave, regulation 13 WTR clearly prevents the carry over of the first four weeks of statutory annual leave. However, it is arguable that this is not the full answer.
The ECJ has stated that carry over is permissible under the Directive and must be allowed where a worker has been prevented from taking holiday leave due to being on another form of leave. No doubt cases will arise where a worker claims they where too sick to derive any meaningful benefit from taking holiday leave during a particular holiday year and should be allowed to carry it over. What will amount to 'too sick'? What if the cause of the long-term sickness absence also amounts to a disability under the Disability Discrimination Act 1995? Would allowing carry over be a required 'reasonable adjustment'?
As the terms of the Directive have direct effect in relation to public sector employers, this may be of particular concern for them.
Unfortunately, the UK case law does not address this question.
Does a worker on long-term sick leave need to have actually requested holiday leave?
Under regulation 15 WTR, workers must give appropriate notice that they intend to take paid holiday leave. So, workers on long-term sick leave must give notice just as if they were at work (Kigass).
But, does the ability to bring a claim as a deduction from wages claim of itself dispense with the need to have served notice of intention to take leave in order to bring a claim? Assuming an employer has been silent on holiday leave for those on long-term sick leave, why should those on sick leave be able to claim for untaken holiday leave, without giving the notice which those not on sick leave are required to do? Arguably, List Design and Canada Life are limited to saying that the requirement to have first requested holiday leave is only dispensed with where the employer has made it clear that submitting a request for paid holiday leave would be futile.
In the Stringer case the princely sum at stake of £14.16 only related to unpaid holiday pay for the holiday year concurrent with the year of termination. So unfortunately, this remains an undecided point as it was not relevant to Mrs Stringer's situation.
How does this fit in with the ability for an employer to set the times that workers take their leave?
If a worker is receiving sick pay, it may be to their advantage to postpone annual leave until the contractual sick pay period runs out, or until they are back at work. In these circumstances, can the employer oblige the worker to interrupt sick leave to take annual leave?
What about a policy requiring all workers to take bank holidays or an annual shutdown period as holiday leave? In the case of a worker on maternity leave, she must be allowed to take her holiday leave after she has ended her maternity leave period because once on maternity leave the worker cannot go onto another form of leave for a period of time and then go back on maternity leave. The same does not appear to hold true for those on sick leave. Indeed a point raised in the cases is that it is permissible for a worker to choose to go off sick leave to take holiday leave and then go back on sick leave.
What is normal pay?
The ECJ stated that to calculate the holiday pay amount for a worker who has been on long-term sick leave it is "the worker's normal remuneration, which is that which must be maintained during the rest period corresponding to the paid annual leave, is decisive". What does this mean? Presumably their 'normal' pay, not reduced sick pay. If an annual pay rise in a subsequent holiday year was due, can the worker claim pay at the increased rate?
Questions may also arise regarding group income protection scheme payments. The wording of the relevant insurance scheme should be considered.
It is disappointing that the House of Lords failed to address these issues.
Where are we now?
Unfortunately, after nearly a decade of litigation, we are left with more unanswered than answered questions. What is clear is that workers on long-term sick leave are entitled to elect to take paid holiday leave and are entitled to payment for accrued untaken holiday upon termination.
What should employers be doing now?
There are a number of issues to consider and decide on the best approach for your particular organisation.
- For holiday requests in relation to the current holiday year, you will risk a successful claim if you refuse such requests. But you do need to decide how you are going to approach what is 'normal' pay for these purposes.
- On termination of employment, workers should receive payment in lieu for accrued, but untaken holiday in relation to the current holiday year. Again you will need to adopt a consistent approach to what is 'normal' pay.
- For claims to holiday leave for previous years, you need to decide whether you are going to adopt a cautious approach, given the number of unanswered questions, and not pay out on such requests. Once you have paid one person, that will set a precedent which may be difficult to step back from later should you wish. If you decide to pay in respect of back years there are a number of issues you need to look at. For example, are you only going to pay out where there is evidence either that a request to take holiday was made and wrongly refused, or where the worker was prevented from making a holiday request. If the worker is disabled, is there a need to make a 'reasonable adjustment' allowing carry over?
- You will need to look at policies on required holiday days such as bank holidays or annual shutdowns.
- If you offer any funded insurance benefits, such as permanent health insurance, you will need to check how taking holiday affects benefit rights under the policy.
- Generally, you will need to factor in increased cost when managing those on long-term sick. Ensure the long-term absentees, even if out of sight, are not out of mind.