From our recent E-Bulletins on the evolving issue of how statutory holiday relates to sick leave, you will know how complex this area has become. This article is an update following another recent ECJ case on the subject, Pereda v Madrid Movilidad SA, and looks in particular at how the position may differ for public sector and private sector employers.

Note that this article refers to the statutory right to holiday under the Working Time Regulations (WTR). Rights in relation to any contractual holiday over and above the legal minimum depend upon the terms of the worker's employment contract or any collective agreement, policy or practice operated by the employer.

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

Yes. Any worker who is off sick for any period will accrue holiday under the WTR during their period of absence. Even if a worker is off sick for an entire holiday year, or for a large part of a holiday year, he will continue to build up his entitlement to paid statutory holiday under the WTR (28 days since 1 April 2009).

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

Yes. Workers on sick leave can give notice to their employer that they wish to take holiday, even though they are on sick leave at the time the holiday is taken. They may wish to do this once their sick pay runs out. An employer can refuse such a request by giving an appropriate counter-notice. However, if this would prevent the worker from taking holiday in the relevant leave year and they are not allowed to carry forward their unused days (see below), the employer may face a claim for compensation for breach of the WTR.

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

This is unclear. Recent ECJ rulings conflict with the position in the UK under the WTR.

The ECJ position is that, if workers are prevented from taking holidays because of sickness, they must be allowed to take them on their return to work, even if this means carrying them over into the next leave year.

However, the WTR expressly prohibit carry over of any of the 20-day minimum holiday entitlement under the Directive. Employers may, but are not obliged to, permit workers to carry over the additional 8 days' statutory entitlement under the WTR to the next holiday year, provided this is set out in a "relevant agreement". If no such agreement is in place, the WTR effectively prohibit carry over of the full 28-day statutory entitlement.

This conflict between the ECJ rulings and the WTR may result in differing treatment for public and private sector workers:

  • Public sector workers may be able to rely directly on the ECJ decisions to carry over to a later holiday year unused statutory holiday entitlement that accrues during sick leave (Stringer, Pereda). This right definitely applies to the 20 day minimum annual leave entitlement under the Directive, but its application to the additional 8 days of annual leave under the WTR is also arguable.
  • Private sector workers do not have such a right to carry over. Therefore until the WTR are amended, private sector employers should be able to rely on the WTR to prevent carry over of any unused statutory entitlement accruing during sick leave. However, given the direction the Courts are taking in litigation about holiday rights during sickness, employers who deny workers on sick leave the right to carry forward unused holiday may become liable to compensation claims, including claims for years of accrued but unused holiday.

Both the Directive and the WTR prohibit payment in lieu of holidays except on the termination of employment, so employers cannot legitimately seek to prevent untaken holidays building up or being carried over by paying in lieu of any untaken holiday at the end of each holiday year.  

Can a worker be required to take holiday during a period of sickness absence?

This has not been decided, but, by implication, if a worker can designate days of sick leave as annual leave, an employer should also be able to give notice to a worker under the WTR that they must take holiday on particular dates, even if the employee is on sick leave, provided that the employer pays the associated holiday pay.

The Pereda case may cast some doubt on this, but we consider Pereda to apply to particular circumstances (see below).

Can a worker who falls ill during a pre-planned holiday request that the holiday be reallocated?

A key point about the case of Pereda was that the employee was already off sick with a long-term injury when the period of pre-planned annual leave began. It has been suggested that the case could technically allow a worker who fell sick after the commencement of their holiday to make a request to reclassify the holiday as sick leave, thus allowing any worker who catches a cold during their holiday abroad to reclaim some of their holiday time. However, in our view, Pereda should be taken as applying only where long-term sickness prevents a pre-planned holiday being taken.

  • Public sector workers may be able to rely on Pereda directly, but employers can use sickness reporting procedures to combat abuse and insist on satisfactory evidence of the illness.
  • Private sector workers cannot rely directly on this decision and so cannot insist on leave being re-allocated due to illness.

Until the issue is further clarified, all employers would have some justification in refusing to reallocate holiday "spoiled" by illness, unless, as in Pereda, the illness was already known about when the holiday came round. A case by case approach is best for the time being as making changes to policies that are published to employees is likely just to flag up problematic issues.  

How much must a worker be paid for holiday taken during sick leave?

A worker must be paid at their normal rate of pay for any statutory holiday that they take during a period of sick leave, even if they have used up any contractual or statutory sick pay they are entitled to receive.

What if a worker leaves or is dismissed while they are absent due to illness?

As is often the case, the worker will be entitled to be paid in lieu of any outstanding accrued statutory holidays for the current holiday year at their normal rate of pay. Employers may also face claims upon termination for pay in lieu of outstanding holiday for a previous year or years, in which a worker has not taken holidays due to sickness absence (see below for more details).

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

There are now a number of ways in which workers may claim for previous years' statutory holiday, which they have been unable to take due to sickness absence, either while still employed or upon termination of employment.

  • Public sector workers may be able to rely directly on the carry-over provisions established in Stringer (see above). Where they have been prevented from taking holiday due to sickness absence in previous years, they may succeed in arguing that their statutory entitlement should be carried over into the current holiday year and treated in the same way as the current year's entitlement, either by allowing the worker to use the carried over portion while off sick, allowing them to save it for their return to work, or making a payment in lieu upon termination.
  • Private sector employers may be able to rely upon the WTR to prevent carry over of any unused statutory holidays from previous years. If, however, the Courts continue in their current direction, such reliance may not be successful. Employers may be particularly vulnerable to claims for back-dated holiday if they have not actively encouraged the worker to use their holidays while on sick leave.

The Stringer decision opened the way for all 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. 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. The chain of deductions may, however, be considered broken, thus denying the worker the chance to bring any claim for previous years, if the employment has ended more than three months into a new holiday year, and the worker receives holiday pay for the current year.

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. If a contractual provision for pay in lieu of untaken holiday upon termination is not limited to the holiday year in which termination takes place, it is possible that an employee could claim, under contract, for unpaid holiday relevant to their entire period of employment (See the unusual case Beijing Ton Ren Tang (UK) Ltd v Wang in which an employee successfully claimed 131.5 days of holiday pay from previous years).  

What should employers do now?

  • Communicate problem areas to key line management to ensure awareness within the business.
  • Examine whether policies need to be amended, particularly for carry over of holiday. For example, if private sector 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 must take their holiday entitlement in the relevant holiday year, even if they are on long-term sick leave.
  • Review permanent health insurance arrangements. If a worker is in employment and receiving benefits under a PHI scheme, employers should consider providing that the PHI benefit payment includes holiday pay. This may be subject to future challenge following the Stringer decision, but in the meantime it seems inappropriate to pay holiday pay to a "permanently" incapacitated employee.
  • 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. In particular, they should review terms that relate to payment in lieu of unused holiday upon termination of employment, to ensure that such pay in lieu is limited to holidays accrued in the year in which termination occurs.
  • 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.
  • 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.