The House of Lords, in the case of HM Revenue and Customs v Stringer and others has overturned the decision of the Court of Appeal in that case, ruling that claims for unpaid statutory holiday pay and accrued statutory holiday pay on termination under the Working Time Regulations 1998 (“WTRegs”) can be made as unlawful deduction from wages under the Employment Rights Act 1996 (“ERA”), as well as under the WTRegs. This will mean that workers can take advantage of the more favourable time limits which apply under the ERA, which could potentially allow them to claim unpaid holiday pay on termination of their employment going back several years, provided they bring their holiday pay claim within three months of their employer’s most recent failure to pay them holiday pay. This decision will not be welcomed by employers as it will increase the cost of both continuing to employ workers on long term sick leave, and also on termination of their employment. It also leaves unresolved a number of practical problems arising from the decision of the European Court of Justice (ECJ) earlier this year on this issue (see our blog for details of the ECJ decision). 

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.