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.

Sick leave during a period of annual leave

In Pereda v Madrid Movilidad SA, the ECJ considered what happens if a worker falls ill during a pre-arranged period of annual leave. Previously, it had been thought by many employers that the worker would simply lose that annual leave, however the ECJ held in this case that the worker has the option to designate an alternative period of leave as annual leave.

This has potentially far-reaching implications for employers, as a worker who falls ill during a period of annual leave may (subject to notification requirements) be entitled to reclaim this leave. This case also makes clear that, although a worker can take annual leave whilst on sick leave, the employer cannot force the worker to do so.

In Shah v First West Yorkshire Limited, the Leeds Employment Tribunal had to consider how the Pereda case should be interpreted under UK law, in circumstances where there was insufficient annual leave remaining in the current holiday year for the worker to be able to designate an alternative period of leave as annual leave in that holiday year. It was held that, despite the WTR requirement for leave to be taken in the current holiday year, it was possible to interpret that provision in line with the case of Pereda by adding additional wording into the WTR. This permits the carry-over of annual leave into the next holiday year where a worker has been prevented by illness from taking that annual leave in the holiday year to which it relates.

What claims can a worker bring?

There are two types of claims which a worker might bring in relation to statutory holiday entitlement:

• A claim under the WTR.
• An “unlawful deductions from wages” claim. In Stringer, the HL held that holiday pay amounts to “wages”.

Claims under the WTR must ordinarily be brought within three months of the alleged breach, however “unlawful deductions from wages” claims can be brought within three months of the last in a series of unlawful deductions. This means that a worker who has been off sick for a number of years (and who therefore wishes to bring a claim in relation to holiday pay for each holiday year) can potentially back-date a claim over a period of years.

The worker might also bring a breach of contract claim in relation to any alleged failure to pay contractual holiday pay.

Notice to take annual leave

Employers are entitled to require workers to provide notice of their intention to take annual leave. The WTR requires workers (or employers, in the event that the employer wishes to compel the worker to take leave on particular dates) to provide twice as many days’ notice as the number of days’ leave required (i.e. 10 days’ notice for 5 days’ holiday), however this can be varied or excluded by a relevant agreement, which includes a contract of employment.

In Lyons v Mitie Security Limited, the Employment Appeal Tribunal (EAT) held that, provided the employer operates its notice requirements correctly and does not act unreasonably, arbitrarily or capriciously, it can prevent a worker from taking holiday and/or carrying it forward to the next holiday year, if the worker fails to comply with those notice requirements, even if the worker thereby loses that holiday entitlement.

Pay in lieu of annual leave on termination

As outlined above, workers are not entitled to carry forward statutory annual leave under the WTR.

However, in Beijing Ton Ren Tang (UK) Ltd v Wang, the EAT held that a worker who was entitled (under the terms of an oral agreement) to 30 days’ holiday per annum, and who had been informed that she would be paid in lieu of untaken leave on termination, would be entitled on termination of employment to pay in lieu of not only those days outstanding for that holiday year, but also in respect of previous holiday years.

Timing of leave

In some industries it is commonplace for employers to require workers to work intensively over a period of time, followed by a lengthy period of rest. In Craig and Others v Transocean International Resources Limited, the EAT held that offshore workers’ entitlement to annual leave could be satisfied by a working pattern of two weeks working offshore followed by two weeks rest onshore. It was found that the period spent onshore could amount to annual leave, as this was not “working time”.

Annual Leave and Pay - Key Points

• Full-time workers are entitled to 5.6 weeks’ annual leave per year (including Bank Holidays).
• Workers have no entitlement to carry statutory leave forward to the next holiday year (unless they have been unable to take annual leave due to sickness absence), but workers may have a contractual entitlement to do so.
• Workers accrue annual leave during sick leave.
• A worker can take annual leave whilst off sick, but cannot be forced to do so.
• If the worker is not able to take annual leave due to sickness absence, the worker must be permitted to carry it forward to the next holiday year.

Practical tips - leave and sickness absence

• Give notice to workers to take annual leave during a period of long-term sickness absence (but remember that you cannot force the worker to do so).
• If the worker requests leave during long-term sickness absence, but the employer does not want to agree to this, consider issuing a counter-notice preventing the worker from taking that leave.
• Consider operating a “use it or lose it” policy, on the basis that this is in accordance with the WTR. However, be aware that this may well be contrary to EU law.
• Consider arguing that, if a worker fails to request to take or carry forward leave, the entitlement to it is lost.
• Budget for the possibility that employees on long-term sick leave will be entitled to carry forward leave over a number of years, resulting in a large payment in lieu of annual leave on termination.

What happened in this case?

Mr Pereda worked as a specialist driver for Madrid Movilidad SA, a firm responsible for removing wrongly parked cars from public highways in Spain. Mr Pereda had been allocated a period of leave from 16 July to 14 August 2007 in accordance with his employer’s staff leave schedule for that year. A few weeks before he was due to take his leave, he had an accident at work and was unfit for work until 13 August 2007 with a result that during his allocated period of annual leave he was simultaneously on sick leave until the final 2 days. In September, he asked his employer if he could take his annual leave from 15 November to 15 December in the same year on the grounds that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected that request without giving any reasons and Mr Pereda brought a claim in the local Spanish court. The Court was unsure about the correct interpretation of Article 7 of the European Directive 2003/88 on working time, including in particular annual leave, and so asked the ECJ to give guidance.

Article 7 provides that Member States should ensure that every worker is entitled to at least 4 weeks paid annual leave and that this minimum period of paid annual leave cannot be replaced by an allowance in lieu except where the employment is terminated. The Spanish Court asked the ECJ to determine whether Article 7 allows a worker in the circumstances of this case, to postpone his leave, even where this means having to carry forward annual leave into the next holiday year.

The ECJ decision

The ECJ said that the entitlement to paid annual leave under Article 7 must be regarded as a particularly important principle of community social law, from which there can be no derogation. The ECJ confirmed that although national law may lay down conditions for the exercise of the right to paid annual leave, including the loss of that right at the end of the leave or a carry over period, this must be subject to the condition that the worker must have had the opportunity to exercise that right (this principle was established in the recent cases of Schultz-Hoff and Stringer).

As regards the issue in the present case, the ECJ said that a worker must normally be entitled to actual rest for health and safety reasons during his annual leave. The purpose of paid annual leave is to enable the worker to rest and to enjoy a period of relaxation and leisure. The purpose of entitlement to sick leave is different; it is given to the worker so that he can recover from being ill. It follows from this that a worker who is on sick leave during a period of previously scheduled annual leave has the right, on his request and in order that he may actually use his annual leave, to take that leave during a period which does not coincide with the period of sick leave. The ECJ said the right to reschedule the leave must be subject to the rules and procedures of national law and the interests of the various parties involved, and if for these reasons the worker is unable to take a new period of annual leave, the employer is obliged to grant the worker a different period of annual leave which is compatible with those interests, even if that this means that the annual leave may have to be carried forward into the next holiday year.

What this decision means for employers

EU law provides that workers are entitled to at least 4 weeks paid annual leave. This right is conferred in the UK by the Working Time Regulations 1998 ("WTRegs") which entitle workers to 5.6 weeks’ paid holiday per year (ie 1.6 weeks more that the basic EU right under Article 7). The WTRegs specifically provide that this leave must be taken in the current holiday year, so cannot be carried forward to the next. The ECJ in Pereda has now made it clear that statutory leave can be carried forward in certain cases. It is not clear whether this right applies to the minimum 4 weeks as provided by EU law or whether it would extend to the full 5.6 weeks under the WTRegs. It is likely to be the latter, but this will no doubt be considered by the UK Courts in the future.

Some employers allow their workers to reschedule their annual leave if they fall sick whilst on holiday. However, the WTRegs do not give workers a right to do this. Reg 15 WTRegs gives an employer the right to require a worker to take annual leave on a certain date. It does not give a worker the right to refuse, cancel or rearrange that leave – that can only be done by mutual agreement. Pereda concerned a worker who fell sick prior to going on holiday. It is therefore arguable that Pereda is not authority for the proposition that employees who fall sick during their annual holiday are entitled to extra days off in lieu. That said, in our opinion it is difficult to see why the same rationale cannot be applied to such cases. One further point is that given that the ECJ has said that a worker might be able to choose his leave in these circumstances, this case now raises doubts as to whether a worker who is on long term sick leave can be forced by the employer to take his statutory annual leave at the same time (thus saving the employer money on sick pay in some cases).

Public sector workers will immediately be able to benefit from the ruling in Pereda because of the doctrine of "direct effect" which allows them to enforce EU law directly in the UK courts. It will not be as easy for private sector workers since they are unable to enforce EU rights directly in a tribunal. Their option is either to wait until the WTRegs are amended or ask an Employment Tribunal to interpret the WTRegs so as to take account of the purpose behind the EU law (this is known as "indirect effect"). If the Tribunal is unable to do this (as seems likely), the WTRegs will prevail as they stand.