European Court of Justice judgment in (1) Stringer v HMRC and (2) Schultz-Hoff v Deutsche Rentenversicherung Bund

The European Court of Justice (“ECJ”) yesterday issued a very employee-friendly judgment on accrual of statutory holiday during sick leave in two cases referred by British (House of Lords) and German courts which raised similar issues. The ECJ has held that although the UK and other member states can legislate to, or uphold contracts which, prevent workers on sick leave from taking paid holiday during such leave, workers do not lose their statutory entitlement (28 paid days per year for leave years starting on or after 1 April 2009) and can carry it over into new leave years if untaken, either to take it upon recovery or to be paid it in lieu on termination of employment.

Facts

The British case is better known as Ainsworth v HMRC. The claimants were all previously employees of HMRC. One claimant wanted to take paid annual leave during a period of unpaid sick leave but was prevented from doing so. The remaining claimants had been absent on sick leave and were then dismissed. None of the claimants had taken any holiday whilst on sick leave and, upon termination of their employment, sought payment in lieu of outstanding annual leave (declined by the employer on the principle that “you can’t take leave from leave”).

The German case involved a claimant who had become ill in one leave year and applied (successfully) for ill health early retirement in the next. His employer declined to allow him to take any of the two different years’ accrued holiday before retirement or to pay in lieu, relying in part on a German law which only allowed carry over of holiday for a short period at the beginning of the following year.

Law in the UK

Under Regulations 13 and 13A of the Working Time Regulations 1998 (“WTR”), a full time worker is now entitled to up to 28 days paid annual leave in each leave year. Paid Bank and Public holidays off work count towards this entitlement because “any contractual remuneration paid to a worker in respect of a period of leave” is offset against the statutory right to payment. The WTR are, however, ambiguous regarding whether that offset applies where payment is made for leave which is not designated as a period of annual leave, such as sick leave or periods in which no service is expected but the worker is receiving full or partial replacement income through permanent health insurance.

UK approach prior to the ECJ

The HMRC employees were initially successful before the Employment Tribunal and were awarded compensation in accordance with the WTR. The Employment Appeal Tribunal dismissed the employer’s appeal but gave permission to appeal to the Court of Appeal which allowed the appeals.

The Court of Appeal held that workers on long-term sickness absence who have exhausted their sick pay entitlement (both statutory and contractual) cannot take paid annual leave whilst on sick leave. In addition, if employment ends, they will not be entitled to be paid in lieu of it. The employees appealed to the House of Lords.

The House of Lords decided to stay proceedings and referred the following questions on the interpretation of the Directive to the ECJ:

  • Whether or not a worker could accrue annual leave whilst on sick leave.
  • Whether annual leave could be taken whilst on sick leave.
  • Whether a worker who had been on sick leave for all or part of the holiday year was entitled to be paid for annual leave during that holiday year and, if so, how it should be calculated.

The ECJ has held:

  • Member States may, in national legislation or nationally accepted practices, lay down conditions for the exercise of the right to paid annual leave, including whether an employee may or may not break off sick leave temporarily to take paid annual leave. The right to the paid annual leave, however, may not be “extinguished” by such conditions and it accrues whether or not the worker actually “worked” in the leave year.
  • A worker who is on sick leave for the whole of an annual leave year (or for part of the leave year until it ends) is thus still entitled to the full applicable period of statutory paid annual leave even if unable to take it. The right is granted to every worker, whatever the state of his or her health and sick leave and annual leave have different purposes.
  • While national legislation and nationally accepted practices may generally set limited carry over periods (on a “use it or lose it” basis), these cannot be used against a worker who could not exercise the right for unforeseeable reasons like sickness during the carry over period if that would deny the worker the opportunity of ever benefitting from the right.
  • Where incapacity lasts until termination, on termination of employment an allowance in lieu of accrued but untaken annual leave not taken must be paid to a worker who has not otherwise been able to exercise accrued rights to paid annual leave in that or any earlier holiday year.
  • When calculating the allowance in lieu, the worker’s normal remuneration (which is that which must be maintained during the rest period corresponding to the paid annual leave) must be used. National legislation may not provide that no payment in lieu of paid annual leave is to be paid to a worker whose absence on sick leave is the reason he or she could not take paid annual leave.

The House of Lords will be giving a final judgment in light of the ECJ decision. The House of Lords will inevitably overturn the Court of Appeal’s decision.

It is to be hoped that the House of Lords will consider carefully what the ECJ decision, particularly the last point above, means for employers with generous sick leave or replacement income/permanent health insurance policies. The ECJ did not comment on the relevance of other payments made to employees while off sick which wholly or partly replaced income. The WTR provisions regarding offset of other contractual remuneration thus remain ambiguous.

What this means in practice

This decision is not good news for employers.

All employers should now examine their contractual holiday and sick leave policies, and consider the situation of long term sick workers. The decision leaves open to employers the ability to allow sick employees who have run out of sick pay (statutory or contractual) but remain on sick leave to take paid annual leave in the year it accrues. It remains unclear whether sick employees could be required to do this (but the discussion of the different purposes for leave weigh against this).

The decision establishes that all statutory annual leave accrued whilst on sick leave must otherwise either be carried forward to when the worker returns to work and can take the leave or be paid in lieu if the worker is subsequently dismissed. This is a substantial cost which will need to be accounted for in the books of any business year on year.

It remains unclear whether the employer may offset any contractual remuneration paid during the sick leave period when annual leave might otherwise have been taken. The most generous of employers – those who may have continued salary or a large percentage of salary during an extended sick leave period – may now wish to scale back benefits. Certainly, those employers considering whether, as a matter of discretion, to continue salary payment after contractual sick pay expires, should factor into the decision the accruing cost of untaken paid annual leave unless and until the position on offsetting is clarified.