The House of Lords has recently handed down its decision in the long-running holiday pay case of HM Revenue and Customs v Stringer and others.

The judgment

There were two issues before their Lordships:

  1. whether the claimants (most of whom had retired after long absences because of illness) were entitled to payment under the Working Time Regulations 1998 for holiday pay when they were on long-term sick leave; and
  2. whether failure to make such payments could be unauthorised deduction from wages under the Employment Rights Act 1996.

In considering 1, the House of Lords referred questions to the European Court of Justice (the ECJ) about interpretation of Article 7 of the EC Working Time Directive 2003/88 (the WT Directive). The ECJ held the WT Directive:

  • did not preclude national legislation or practices where a worker on sick leave is not entitled to take paid annual leave during that sick leave. That is, providing he has the opportunity to take his paid annual leave during another period;
  • did preclude national legislation or practices where the right to paid annual leave is extinguished at the end of the leave year and/or of a carry-over period laid down by national law even where the worker has been on sick leave for the whole or part of the leave year and where his incapacity to work has lasted until the end of his employment relationship, which was the reason why he could not exercise his right to paid annual leave; and
  • did preclude national legislation or practices where, on termination of the employment relationship, no allowance in lieu of paid annual leave not taken is to be paid to a worker who has been on sick leave for the whole or part of the leave year and/or of a carry-over period, which was the reason why he could not exercise his right to paid annual leave. For the calculation of 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, is also decisive.

As a result of this ruling, HMRC conceded the claimants could take statutory annual leave during the periods when they were off sick, and they were therefore entitled to holiday pay.

The House of Lords had only therefore to rule on the second issue. It held that failure to pay holiday pay under the Working Time Regulations 1998 can be an unauthorised deduction from wages under the Employment Rights Act 1996.

Significance of the judgment

The ECJ's ruling on the first issue has some important consequences. Employees on sick leave (whether short or long-term) will continue to accrue holiday during this time. If they are off sick for the entire leave year and cannot take their holiday during this time, they should be allowed to carry over this holiday to the next leave year. On termination, any accrued but untaken holiday - which may go back many years for those on long-term sick - must be paid out.

The ruling also throws up several unanswered questions which hopefully will be resolved in subsequent cases. For instance, how does this ruling impact those on long-term sick and in receipt of PHI benefits? Are they entitled to take holiday at their full salary whilst off sick even though they have been receiving a lower percentage of their salary (typically 75 per cent) whilst on sick leave?

The second part of the judgment means that employees have now a more favourable time limit in which to bring their holiday pay claims. The unlawful deduction from wages provisions in the Employment Rights Act 1996 allow employees to bring claims within three months of the last deduction in a series of deductions. So, the time limit for bringing claims will not even start to run until the employment ends