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

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.

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.