Holiday Entitlement and Sickness Absence

by Hazel Phillips

Although the decision of the House of Lords in the Stringer & Others case (previously known as Ainsworth) has been out for some time, the law in this area is far from clear and is causing considerable confusion. There are undoubtedly further cases to come but we wanted to take this opportunity to set out the current position (October 2009) so as to give you an indication of how to handle such issues.
 
The Background

In 2002 the Employment Appeals Tribunal (EAT) finally answered, in the Kigass case, the question of whether workers absent on long term sick leave were entitled to paid annual leave under the Working Time Regulations (WTR).  In Kigass, the decision was that workers were entitled to take statutory holiday whilst on sick leave.  The EAT also held in the Kigass case that, on termination of the employment, workers could claim for unused statutory holiday notwithstanding that they might have been off work sick for long periods during the leave year or absent altogether.

This appeared to settle the legal debate and matters remained relatively settled until April 2005 when the Court of Appeal ruled, in the case of Ainsworth & Others, that the Kigass case had been wrongly decided.  The Court of Appeal decided that a worker was not entitled to take his WTR entitlement to statutory holiday whilst absent from work on sick leave. 

The Court of Appeal also decided in Ainsworth that workers who did not receive holiday pay which they thought they might be entitled to could not use claims for “unlawful deduction from wages” under the Employment Rights Act 1996 to assist them either.  Instead, claims had to be brought under the WTR and so had to be brought within three months of the employer’s failure to make the payment that the employee thought that they were entitled to.  The significance of this was that workers were unable to claim for back pay for holiday in previous years, which might have been possible if an employee could establish that the unpaid monies were part of a series of unlawful deductions.

The decision of the Court of Appeal in Ainsworth & Others was appealed to the House of Lords where (rather oddly) the case became renamed as Stringer & Others.  The House of Lords recognised that very important points of European law arose from the appeal, particularly in relation to the interpretation of the WTR, and referred certain questions for consideration to the European Court of Justice (ECJ). 

The determination of those questions took a number of years.  However, in January 2008, the Advocate General gave her opinion to the ECJ that:

• Workers on sick leave should be able to designate a future period as holiday.  However, they should not be able to take holiday whilst they remain on sick leave.

• On termination of employment, workers must be paid in lieu of holidays which they have accrued regardless of whether they have been on sick leave for all or part of the leave year in question.

• In relation to a parallel German case, the Advocate General stated that where, because of illness, a worker cannot take holiday during the holiday year, he must be granted holiday at a later date.

The ECJ finally issued its judgment in January 2009. The ECJ largely agreed with the opinion of Advocate General but went further than she had done. The ECJ ruled that:

• If national legislation or practice so provides, a worker is not entitled to take statutory holiday whilst on sick leave.  However, there is nothing to preclude national legislation or practices from allowing a worker to take statutory holiday whilst on sick leave.

• Statutory holiday entitlement is not extinguished at the end of the leave year.  Where a worker has been absent on sick leave for the whole or part of a leave year, preventing them from taking their full statutory holiday entitlement of that year, they must be allowed to carry their statutory leave into the next holiday year or, if their employment has ended, be paid in lieu of the untaken leave on termination of their employment.

The question for the House of Lords in the Stringer case was to consider the judgment of the ECJ and its application to the WTR.

The most difficult problem that needed to be considered was how to get round Regulation 13 (9) of the WTR, which specifically precludes any carry-over of statutory leave into the next year.

Something completely unexpected then happened in the chain of events.  The other side to the appeal in the Stringer & Others case was the HM Revenue and Customs (HMRC).  Having considered the judgment of the ECJ, HMRC informed the House of Lords that it now accepted that the decision of the Court of Appeal on certain points in Ainsworth & Others was wrong.  Unfortunately, this concession meant that the House of Lords was able to sidestep dealing with some of the important issues arising from the WTR and their interpretation.

However, the decision which did come out has had the net effect of restoring the law relating to entitlement to holiday and long term sickness under the WTR to what it was prior to the decision of the Court of Appeal in Ainsworth & Others: i.e. that workers can take statutory holiday whilst on sick leave, and that, on termination of the employment, workers can claim for unused statutory holiday even if they have been absent for some or all of the year.

Additionally, the House of Lords went on to look at the question of whether a claim for holiday pay in lieu of unused statutory holiday can be brought as a claim for unlawful deduction of wages or whether it must be brought as a specific claim under the WTR.  As explained above, this is important because it determines the time limit for bringing a claim and how long back an employee can look when trying to bring that claim.

On this point, the House of Lords reversed the Court of Appeal’s decision in Ainsworth & Others and confirmed that such claims can be brought as claims for unlawful deduction from wages. Thus, within three months of the lost deduction, they may be able to claim in respect of deductions throughout their employment (see iii) below.  However, it is important to note that this enables workers to bring claims for holiday pay for statutory holiday not taken because of sickness but not necessarily contractual holiday.

As explained above, the House of Lords chose not to deal with all of the questions asked of it.  For example, the ECJ ruled that where a worker has been absent on sick leave for the whole or part of a leave year, which prevents the worker from taking his full statutory holiday entitlement for that year, the worker must be allowed to carry it over until such time as the worker is able to take that leave.  This would suggest that, for example, where a worker who is ill for the whole of the leave year and say for the first three months of the following year, the worker must take any carried-over leave as soon as he is able to do so, or he will lose it.  There will almost certainly need to be further litigation to clarify this point.

However, the present law applicable in England and Wales appears to be this in relation to statutory holiday:

(i) A worker who is absent from work by reason of sickness is entitled to give notice to his employer of his wish to take statutory holiday. Nothing has changed, and under Regulation 15 of the WTR, a worker is obliged to give twice as many days’ advance notice of the holiday as the number of days’ holiday which he wishes to take.

Regulation 15 also authorises an employer to instruct a worker to take leave or not to take leave. If the instruction is when to take leave, then the employer also has to give twice the number of days’ notice of this. Where the instruction is not to take leave, the notice period must be equivalent to the number of days leave which the employer wishes to prohibit.

 The notice requirements can be varied by agreement, which must be in writing.

(ii) Pursuant to Regulation 13 of the WTR private sector workers in the UK are still not permitted to carry over unused statutory holiday into the next year. This appears to be in direct conflict with the Stringer decision The position is slightly better for employees in the public sector who can rely on and bring claims directly under the EC legislation.  Hence, individuals working in the public sector could, for example, seek to bring a claim under the EC Working Time Directive for holiday entitlement which has not been carried over due to sickness whilst still in employment. Non public sector employees cannot do so as they must rely on the WTR and so are trapped for the moment by this conflict. However, this is likely to be addressed relatively promptly by Parliament.

(iii) When the employment of a worker comes to an end, the worker is entitled to holiday pay in lieu of the unused portion of his entitlement to statutory holiday in that final leave year.  He is also entitled to claim for unused holiday from previous years where these amount to a continuous sequence of deductions where he was unable to take his statutory holiday by reason of sickness.

(iii) A worker who remains in employment and who does not utilise his full statutory holiday entitlement in any year due to sickness is not currently allowed to claim for the unused holiday entitlement whilst remaining an employee.  The right to make a claim only arises once the employment relationship has come to an end.

The unresolved issues mean that the position for most employers remains highly unsatisfactory. For those in the public sector, the principle of ‘Direct Effect’ means that a worker cannot be precluded from carrying over statutory holiday into the next year if the reason for his not being able to take his statutory holiday is that he has been prevented from taking it because of illness.  This will cover the situation where a worker has been off all year but it will also cover the situation where a worker has been off ill at the end of his leave year and has, therefore, been prevented from taking the balance of his statutory holiday. Consequently, employees in the public sector should be entitled (because of illness) to carry over any pro rata unused entitlement from the 20 workings days’ holiday given by right under the EC Working Time Directive (note: not the 28 days given under the WTR). 

For those employers with employees currently off on long term sickness absence, waiting around to see what the outcome of further litigation will be would not seem to be an attractive option. We would therefore suggest the following:

a) Employers should start to budget on the basis that all employees whether sick or not are going to be paid for their statutory holiday entitlement in the leave year in question.

b) In order not to build up a backlog of potential holiday entitlement, it would seem to be a good idea to pay those employees who are off sick their holiday entitlement at the end of the leave year whether they request such payment or not.

c) Employers could consider instructing sick employees to take holiday whilst off sick.  This should allow the employer to merely top up contractual sick pay to normal holiday pay for days which can be classed as annual leave.  However, actually implementing this may cause problems and employees who are receiving statutory sick pay (SSP) only cannot receive such top ups because the SSP scheme does not allow for this.

d)  Another option would be to encourage (or force where contractual provisions permit) employees to take the accrued holiday during a phased return plan so that it is used up immediately upon return to work but employers should always be cautious of disability discrimination claims when implementing this.

This is an extremely complex area of law. Whilst we hoped that Stringer would bring clarity it has, in fact, created more questions than answers. Ultimately, employers are going to have to watch out for the cases which will undoubtedly follow the decision but should start thinking proactively about how to manage any absences now.

For further information on holiday pay and sickness, contact Burnetts' employment law team on 01228 552222.

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