Employment Law Watch : Employment & Labor Lawyer & Attorney : Reed Smith Law Firm

Statutory annual leave – key principles

Following the EAT’s decision, the annual leave entitlement under the WTR for workers off work on sick leave can be summarised as follows:

• All workers are entitled to a period of 5.6 weeks’ statutory annual leave for each leave year.
• A worker who is off work on sick leave continues to accrue annual leave during their sick leave period and is entitled to elect to take annual leave during their sick leave period.
• A worker on long-term sick leave must request to take annual leave in line with the requirements of the WTR in order to be entitled to be paid for it. If no election to take annual leave is made during the leave year (or the election does not comply with the notice provisions of the WTR), no entitlement to be paid arises, unless perhaps there are circumstances in which the employee was unable to make the request.
• On termination of employment, an employer must make a payment in lieu of accrued but untaken annual leave to the worker for the leave year in which the worker’s employment terminates. The worker is not entitled to be paid in lieu of accrued but untaken annual leave for previous annual leave years where no request to take annual leave was made by the worker during the leave year, unless perhaps there are circumstances in which the employee was unable to make the request.
• The situation is more complex where the worker requests leave but wishes to defer the period of annual leave until they are well enough to return to work. Provided the worker has given notice to take annual leave in accordance with the WTR, if there is insufficient time for the worker to take the leave upon return to work before the end of the current leave year, the employer might be obliged to permit the employee to carry over that leave into the next leave year. If employment terminates before the leave can be taken, the worker is likely to be entitled to payment in respect of that carried forward annual leave on termination. Definitive guidance on these points is still required. 
• There is no duty on the employer to make a worker aware of their right to request annual leave whilst on sick leave.

The summary above demonstrates that the WTR rules on the annual leave entitlement of workers off work on long term sick leave involve a number of artificial distinctions that are difficult to justify. Further, the complexity of the rules creates confusion as regards what to pay a worker in respect of their accrued but untaken annual leave on termination of employment.

Two further issues add to the complexity of what is becoming a fiendishly difficult area of law. First, the WTR only regulate a worker's statutory annual leave and pay entitlements under the WTR. Of course, in practice many employers provide annual leave entitlements in excess of the WTR minimum requirements either under the contract of employment or via a collective agreement. Therefore, a distinction must be drawn between WTR annual leave entitlements and any “additional” annual leave entitlement where the question of carry forward and payment in lieu is determined by looking at what was agreed between the parties.

Secondly, the WTR represent the UK Government’s implementation of the EU Working Time Directive. Therefore, the question of whether the WTR rules are consistent with the requirements of the Working Time Directive is also relevant. The ECJ case of Pereda decided that the Working Time Directive requires that annual leave can be carried forward to the next holiday year if there is insufficient time for the employee to take that holiday on return to work from a period of sick leave. However, that position is incompatible with the WTR because the WTR expressly prohibits annual leave being carried forward. The question as to whether an employee is entitled to carry forward indefinitely under the Working Time Directive is currently subject to scrutiny in the ECJ case of KHS AG v Schulte C-214/10 where the Advocate General has already given her opinion that allowing workers to carry forward annual leave over several years would not achieve the Directive’s health and safety purpose of enabling workers to rest and recuperate. The ECJ is not obliged to follow the Advocate General’s opinion but often does do so. Furthermore, the UK Government has proposed in its “Consultation on Modern Workplaces” to address this issue and the Government’s response is now awaited. In the meantime, employers are left having to track the latest guidance from the UK courts. 

Due the complexities of the WTR and the current state of the law, a fuller analysis of the EAT’s decision in Fraser v Southwest London St George’s Mental Health Trust follows below:

What happened in this case?

Miss Fraser, the Claimant, was a nurse working for the South West London St George’s Mental Health Trust (the “Trust”). In November 2005, she injured her knee at work and went off sick. Her sick pay expired after nine months, in August 2006. She was dismissed in 2008 after being off sick for a large amount of the time following her injury. On her dismissal, the Trust paid her in lieu of untaken leave in the final year of her employment but nothing in respect of the two previous leave years. Miss Fraser brought a claim in the Employment Tribunal for unpaid holiday pay for those two previous leave years. The Tribunal decided that Miss Fraser was not entitled to holiday pay for those previous holiday years as she had not given notice to the Trust of her intention to take leave during those holiday years, as required by Regulation 15 WTR. The Tribunal said that Miss Fraser had not produced any evidence to the Tribunal to show that she was unable to take leave during her sickness. Miss Fraser appealed. The EAT agreed with the Tribunal and dismissed Miss Fraser’s appeal.

The EAT considered the rules contained in the WTR:

• Leave may only be taken in the leave year in respect of which it is due and may not be replaced by a payment in lieu except on termination (Regulation 13(9)).
• On termination, a worker has a right to pay in lieu of leave not used (Regulation 14).
• A worker may take leave on days he or she elects by notice to the employer (Regulation 15).
• A worker has the right to be paid for annual leave taken (Regulation 16).
• A worker may complain to an Employment Tribunal where the employer has refused to grant leave on request, or make a payment in lieu on termination (Regulation 13).

The EAT considered first whether it was a condition of her entitlement to holiday pay that Miss Fraser should have formally given notice under Regulation 15. 

It was argued on behalf of Miss Fraser that it did not matter that she had not formally “taken” her annual leave by serving the appropriate notice – all that mattered was that she was entitled to it. This argument followed the previous EAT case of List Design, as endorsed by another case of Canada Life (which was a case where employment had terminated and the employee was entitled to claim in respect of previous holiday years).

The EAT ruled that both these cases were wrongly decided. It said that the purpose of the WTR is for employees to take full annual leave in the interest of health and safety. If they are paid instead of actually taking the leave, there would be an incentive not to take it. It cannot therefore be right for employees to receive holiday pay for leave they have never taken. This concurs with the EAT in Kigass where the EAT held that an employer must pay the employee for each week of leave actually taken.

The EAT concluded that Miss Fraser’s entitlement to holiday pay under Regulation 16 depended on her having given proper notice under Regulation 15 of her intention to take annual leave. The EAT commented that it may seem artificial for an employee who is not at work to have to give notice in this way, but that “merely reflects the artificiality of a period of long term sickness counting as holiday at all”.

The EAT said their decision was consistent with the European cases on this issue. It is clear from European Court decisions that an employee off work as a result of sickness has a choice, either to take annual leave during their sick leave or to ask for it to be deferred to a later period (Pereda). If Miss Fraser had made a request to defer her holidays accruing in her years off sick to a later date when she recovers, the Trust might have had to allow her to take such holidays upon her recovery, and if she had not had the chance to take that holiday before her dismissal, it might be necessary to read into Regulation 14 an entitlement to payment in lieu.

Miss Fraser also argued that the Trust was under an implied contractual duty to inform her of her right to request annual leave whilst absent on sick leave. She argued that, following the case of Scally v Southern Health and Social Services Board (1992), there is an implied obligation on employers to inform employees of a contractual benefit. The EAT distinguished this case, saying that Scally involved a collectively negotiated contract, whereas in the present case the entitlement arose as a matter of general law. The EAT held that except in particular circumstances, the general law did not place any duty on an employer to advise its employees of their rights.

Background to the HL decision

This case is the culmination of several years of litigation which began with claims in the Employment Tribunal by five employees of the Inland Revenue for holiday pay while they had been on long term sick leave. Mr Ainsworth, one of the claimants, made a claim for statutory holiday pay which he asserted was outstanding on termination of his employment, even though he had, until termination, been on long term sick leave. The Employment Tribunal and the Employment Appeal Tribunal (EAT) upheld his claim but it was overturned by the Court of Appeal (CA) in 2005. On further appeal, the House of Lords (HL) referred several questions to the European Court of Justice (ECJ) which handed down its decision earlier this year. In its judgment, the ECJ decided that Member States are permitted under the EC Working Time Directive (which the WTRegs are intended to implement in the UK) to:

• allow workers on sick leave to take annual leave at the same time as being off sick and to forbid the carrying over of annual leave from the holiday to the next; OR
• prevent workers from taking annual leave at the same time as sick leave, provided that the worker has the opportunity to take the annual leave at some point

This decision was significant for employers because Article 7 of the Directive provides that the minimum period of leave which it gives may not be replaced by a payment in lieu of such leave except on termination of employment. For further explanation of this see our blog.

The House of Lords’ decision

The only issue which the HL addressed in its judgment was whether workers can bring claims for holiday pay only under the WTRegs, or whether they can also use the more favourable regime under the ERA which applies to unlawful deductions from “wages”. Under the WTRegs, a claim must be brought within three months of the initial breach of the WTRegs whereas under the ERA, a claim must be brought within three months of the deduction from wages (ie failure to pay) or, if there is a series of deductions, the last in that series (thus allowing workers to claim for deductions going back more than three months). 

The House of Lords’ reasoning

For the more favourable time limits of the ERA to apply, the claim for unpaid holiday pay has to fall within the definition of “wages” in section 27 ERA. Overturning the CA decision on this point, and restoring the original decision of the EAT, the HL held that it does because there was no good reason to take a restrictive view of the wide and natural meaning of “wages” which is as set out in section 27. The HL also pointed out that the European Community Law principle of “equivalence” meant that national remedies for breach of EU rights (such as failure to give paid annual leave under the WTRegs) must be no less favourable than those available in similar domestic proceedings. Applying this principle to the present case, the HL held that the remedy for claims for holiday pay due under the WTRegs must be no less favourable than claims for unlawful deductions from wages under the ERA. 

What this decision means for employers

Many of the points considered by the ECJ have been left unanswered because the parties to this litigation agreed that the main issue of whether holidays could accrue during sick leave had been decided by the ECJ. We are therefore left in the unsatisfactory position of not having a clear and authoritative ruling on the effects of the ECJ’s judgment as they apply in the UK.

It seems clear from the ECJ’s decision that employers should allow workers to take their paid statutory holidays during the holiday year even when they are off sick. This is because the WTRegs provide that a worker cannot carry over their accrued holiday entitlement to the following holiday year. There appears to be no direct obligation on employers to offer paid holidays to workers. The worker may, however, subject to certain exceptions, make a request to take such leave under Regulation 15 WTRegs. If the employer refuses to allow the worker to take the leave at all, the worker can make a claim for compensation under Regulation 30 provided it is made within 3 months beginning with the date on which it is alleged that the statutory holiday request should have been granted.  Otherwise, there is no right under the WTRegs to payment in lieu of untaken leave, except on termination of employment. It is therefore unlikely that a claim for unlawful deduction of wages under the ERA regime could be brought during employment even if the employer refuses to allow the worker to take the leave.  The ECJ decision leaves open the possibility that the unpaid holiday can be carried forward to the next holiday year if the employer refuses the worker the chance to take the leave, despite the current prohibition in the WTRegs. These are points which will no doubt be considered by the Courts in the future.

It is clear that on termination of employment, any payment in lieu of holiday must be calculated on the basis that a worker will accrue annual leave under the WTRegs when the worker is off sick. 

Finally, holiday pay which has accrued during the holiday year in which the employment terminates is payable and any claim in respect of such sum must be brought within three months of termination. But what about claims for unpaid holiday in respect of the previous holiday year? The HL held that the worker will have a claim under the ERA for unlawful deduction of wages and this claim must be made within three months of the date of the deduction or, in the case of a series of deductions, the last in that series. This has now opened the possibility that the worker will be able to claim for holiday pay accrued over the current and the preceding holiday year. There are two observations we can make from this:

• there is case law to suggest that it is not necessary for the worker to have requested the holiday pay during or at the end of the relevant leave year for such a claim to be successful but this is not clear and it is likely that this point will be the subject of litigation in the future;
• where the employment terminates more than three months after the start of the holiday year, there appears to be scope for an employer to break the chain in the “series of deductions”, and thus deny the worker the opportunity of claiming for previous holiday years, by satisfying its obligations in respect of the current holiday year. This possible method of avoiding potentially large claims for back pay will no doubt be scrutinised by the Courts in any future proceedings on this issue.

What is clear is that the HL decision in Stringer case will not be the last word on this matter.

The ECJ was asked by the UK and German Courts to rule on issues concerning the right to paid holiday in the case of workers on long term sick leave. In the UK case of Stringer v HM Customs & Excise (fomerly Commissioners of Inland Revenue v Ainsworth), Mrs Stringer and other employees of HM Revenue and Customs, some of who had been dismissed, had been absent on sick leave. One worker argued that she should be entitled to 4 weeks paid holiday for all the time she was on sick leave. The other 3 workers claimed pay in lieu of untaken holiday when their employment was terminated following a period of long term sickness.

In the German case of Schultz-Hoff v Deutsche Rentenversicherung Bund, Mr Schultz-Hoff, was on long term sick leave when his employment was terminated. He brought a claim in the German Courts for paid annual leave not taken in 2004 and 2005.

The ECJ considered both cases together as they raised similar issues. The Court considered the provisions of the Working Time Directive 2003/88/EC and in particular Article 7 which provides that all workers are entitled to at least 4 weeks’ paid annual leave in accordance with the conditions for entitlement to such leave and the granting of it, which are laid down by national law. Article 7 also provides that the minimum period of leave may not be replaced by a payment in lieu of such leave except on termination of employment.

The ECJ decided that a worker cannot be deprived of the right to paid holiday when he or she has not had the opportunity to take it. Therefore a worker who has been absent from work during the whole of a holiday year cannot be denied the right to holiday pay for that year. National legislation may provide that the right to paid annual leave is lost at the end of a leave year provided that the worker has had the opportunity to exercise that right.

The ECJ also said that national legislation may provide that a worker on sick leave cannot take annual leave at the same time. However, the worker must be able to take it at a later date.

What does this mean for employers?

Right to paid holiday whilst on sick leave - It is now clear that a worker is entitled to take paid holiday leave at the same time as sick leave if national law provides for this. It is also clear that workers on sick leave do not lose their right to statutory holiday pay irrespective of the length of the sick leave; instead it will accrue whilst they are absent. The Court of Appeal’s judgment in Ainsworth in 2005 left the question of accrual uncertain but did rule that under UK law, paid holiday leave cannot be taken at the same time as sickness absence. This part of the Court of Appeal’s judgment is therefore likely to be incorrect.

Right to carry over to next holiday year - The Working Time Regulations 1998 (“WTRegs”) which implement the Working Time Directive do not permit carry over of statutory holiday pay from one leave year to the next. However, the ECJ said that a worker’s right to holiday pay cannot be extinguished at the end of the leave year if the worker has not had the chance to take the holiday. Although it is not explicitly stated in the judgment, this undoubtedly means that workers on sick leave can carry over their accrued holiday and take it in the next holiday year if the worker has not been paid for his or her statutory holidays during the year.  Note that it will still be permissible for the WTRegs to prevent carry forward of the statutory holiday entitlement of ordinary workers who have had the opportunity to take the holiday (e.g. because they are not off sick).

Right to pay in lieu on termination - On termination of employment, the worker will be entitled to pay in lieu of any untaken holiday pay in circumstances where he has not had the opportunity to take it (such as if they are still off sick when their employment is terminated). A worker who is absent on sick leave for the entire holiday year will therefore be able to carry over his right to paid holiday pay and if he is terminated during the next holiday year, he will be entitled to be paid in lieu of all the holidays not taken (including those carried over). If the worker is absent for part of the holiday year and still on sick leave when the employment terminates, again the worker will be entitled to pay in lieu of the holiday not taken. 

What next? - The UK case of Stringer will now return to the House of Lords (HL) for a decision on how the ECJ’s decision applies in the UK with regard to the WTRegs. The HL will have to decide whether the WTRegs allow holiday to be taken during sick leave (as mentioned above, the Court of Appeal in 2005 ruled that it could not) and second, whether the WTRegs are incompatible with EC law because they prohibit carry forward of untaken holidays to the next holiday year.  We think it is likely that the HL will overturn the Court of Appeal’s 1995 decision so as to permit workers to take holiday during sick leave. As regards carry forward of untaken holidays to the next holiday year, the position is less clear. The HL may decide that the WTRegs are incompatible with EC law so that they will have to be amended (note that this will not have retrospective effect), but equally the HL may decide this is unnecessary if workers have the opportunity to take holiday leave whilst off sick. A final point to note is that the Directive gives workers an entitlement of 20 days holiday, whereas the statutory minimum under the WTRegs is currently 24 days, increasing to 28 in April this year. Workers may also be entitled to additional holiday on top of this statutory minimum. The HL will only be concerned with the 20 day statutory minimum as it applied to the claimants in this case. It is unclear if the principles laid down by the ECJ apply in the UK only to the 20 day minimum laid down by the Directive, or to the higher statutory minimum laid down by the WTRegs; it remains to be seen if the HL will shed any light on this.   

Public v Private sector employers -The ECJ’s decision will now be binding on public authorities so that their workers will immediately be entitled to carry forward unused statutory holiday pay if their absence on sick leave has prevented them from taking it. On termination they will be entitled to pay in lieu of any such untaken accrued holiday pay. The position is less clear for private sector employees because for them, the ECJ’s decision is not directly enforceable.  It is best for private sector employers to sit tight, assume for now that the law is as laid down by the Court of Appeal in Ainsworth in 2005 and wait until the HL decides how the ECJ’s decision applies to UK law. Workers in the private sector should bring their claims now and ask the Tribunal for a stay pending the HL ruling. Private sector employers faced with such claims are advised to do the same and request a stay.