Holiday pay and sickness absence – Where are we now?

Is a worker entitled to accrue holiday whilst on sick leave? Are they entitled to be paid in lieu of any holiday they have not taken due to sickness absence? If so, for how long will such an entitlement continue to accrue? These are all questions that have been dealt with by the courts over the last two years and the aim of this note is to summarise where the law now stands on this issue.

What do we know?

Below are the points that have been established by current case law:

A worker accrues statutory annual leave whilst on sick leave;
A worker can nominate to take statutory annual leave during a period of sickness absence but cannot be compelled by an employer to do so;
Where a worker falls ill before or during a period of arranged annual leave, they are entitled to rearrange it for another time upon their return or, if there is insufficient time left in the holiday year to take the leave, they may carry that leave forward. The payment the worker receives for the period of sickness absence depends upon his entitlement to statutory and contractual sick pay and his compliance with the rules relating to such entitlement. He would not necessarily be entitled to full pay during this period;
Where a worker has been absent due to sickness for the whole of a leave year and has therefore been unable to take his statutory annual leave, the worker is entitled to carry forward his statutory annual leave to the new leave year;
Where a worker has been absent due to sickness for part of a leave year, it will be a question of fact for a Tribunal to decide whether the worker had the opportunity to take their statutory annual leave in that leave year. The ECJ decision in Pareda envisaged a situation where a worker had only been absent on sick leave for part of the year but still had not been able to exercise their right to annual leave due to ill health;
Upon the termination of employment a worker is entitled to be paid in lieu of all accrued but untaken holiday.

Below is a summary of the legislation relating to the entitlement to annual leave and the key case law decisions that have established how that legislation should be interpreted. We also go on to look at the issues that remain unclear and how these might be resolved.

Recap of key legal provisions

The entitlement to statutory holiday pay derives from the European Working Time Directive (“WTD”) which the UK Government implemented through the Working Time Regulations 1998 (“WTR”). Under the WTR a worker is entitled to the following:

5.6 weeks’ paid annual leave – this equates to 28 days for a worker working 5 days a week (Regulations 13 & 13A);
A worker may take leave by giving his employer notice of the holiday he wishes to take, subject to the employer’s right to require the worker to take or not take leave on particular days, by giving the worker a notice to that effect (Regulation 15);
Upon termination of employment a worker is entitled to be paid in lieu of all accrued but untaken annual leave (Regulation 14);
Annual leave may only be taken in the leave year in which it is due and may not be replaced by a payment in lieu other than upon termination of employment (Regulation 13(9)).

The WTD provides for only 4 weeks’ paid leave and the UK Government granted an additional 1.6 weeks annual leave to UK employees in April 2009. This additional 1.6 weeks is not therefore a right derived under European law.

Any holiday provided to a worker over and above the 5.6 weeks required by law will be a matter for the contract of employment. So long as there is no discrimination, an employer is free to decide the terms upon which it grants any additional contractual holiday.

Key decisions

As the right to statutory holiday pay derives from Europe, our courts have an obligation to construe the WTR in line with the WTD and therefore will take into consideration any decision of the European Court of Justice (“ECJ”) relating to the interpretation of the WTD. National courts will also refer any cases to the ECJ where they concern the interpretation of European law.

Stringer

The first key decision made by the ECJ relating to holiday and sickness absence was the linked cases of Stringer and others v HMRC; Shultz-Hoff v Deutsche Rentenversicherung (referred by the UK and German Courts respectively) in 2009. The ECJ in its judgement confirmed the following:

Under the WTD workers are entitled to continue to accrue their entitlement to annual leave during any period of sickness absence;
The WTD does not preclude a worker taking paid annual leave during a period when they would otherwise be absent due to sickness, and this is a matter for national law;
If a worker is prevented by any provision of national law from taking annual leave in any leave year due to sickness they must be entitled to carry it forward.

Following this decision the House of Lords (now the Supreme Court) confirmed that as the WTR prohibits the carrying forward of annual leave to a future leave year, workers must be entitled to take annual leave during periods of sick leave, as otherwise they would lose their entitlement.

Pareda

The case of Pareda v Madrid Movilidad SA was also decided by the ECJ shortly after Stringer in 2009. In this case, which was referred by the Spanish courts, the central issue was whether a worker is entitled to reschedule his prearranged annual leave when he falls ill shortly before or during that period of annual leave. The ECJ confirmed:

That the WTD precludes any national provision which prevents a worker from taking annual leave at a time other than originally scheduled and, if necessary, to carry it forward where it otherwise could not be taken due to the worker’s sickness;
The WTD does not preclude any national provision making conditions on the exercise of the right to annual leave, including the loss of the right at the end of the leave year, provided the worker has had the opportunity to exercise that right. The right to annual leave must not be extinguished where at the end of the leave year, a worker has been off work due to sickness for whole or part of the year and has not had the opportunity to take it;
The purpose of annual leave is to enable a worker to rest and enjoy a period of relaxation and leisure - which he will not be able to do if he is sick.

This decision therefore strongly indicates that an employer cannot compel a worker to take holiday during a period of sickness absence and that where the worker refuses to do so they would be entitled to carry the holiday forward if they will have no other opportunity to take it in the leave year in which it is due. This decision would appear, however, to support the view that a worker may lose their annual leave entitlement where they had the opportunity to take it but failed to do so, due to reasons other than sickness (and presumably also other than certain family related absence such as maternity leave).

Larner

The case of NHS Leeds v Larner 2011 was determined by the Employment Appeals Tribunal (“EAT”) in June 2011, and is the most recent UK appeal decision. In this case the EAT was asked to consider whether an entitlement to be paid in lieu of accrued holiday upon termination required the worker to have first submitted a formal request to take that annual leave under Regulation 15. The EAT held:

That the notice requirements in Regulation 15 are not mandatory and that a failure to give a notice requesting to take annual leave at a certain date will not mean a worker loses that annual leave or is prevented from carrying it forward where they have been unable to take it due to ill health;
Where a worker has been off for the whole of the leave year due to sickness there is a presumption that they were not well enough to exercise their right to annual leave and therefore as a matter of law would not have had the opportunity to take the annual leave;
The right to annual leave must be carried forward to the following year without having to make a formal request for such leave to be carried over;
The right to be paid for the accrued but untaken annual leave crystallises upon the termination of employment.

The EAT did not seem troubled by the fact that the WTR do not allow an employee to carry forward holiday. It would appear therefore that national courts will interpret the WTR, as necessary, to ensure they are compatible with European law.

Schulte

We are awaiting the ECJ’s decision in the case of KHS AG v Schulte, referred by the German courts, concerning the issue of whether the WTD precludes national provisions from stipulating that the right to carry forward leave, which a worker has been unable to take due to sickness, extinguishes after a set period of time or whether it must accumulate without limit.

The Attorney General has delivered her opinion and concluded that the WTD does not require workers to be entitled to accumulate the right to paid annual leave, during long term sickness absence, without any limitation. She accepted that allowing a worker to accrue several years’ worth of annual leave and take it some time after the leave year in which it accrued would not achieve the purpose of the WTD to enable the worker to recuperate from the effort and stresses of that year. The Attorney General also considered that applying a limit whereby accrued but untaken annual leave is lost 18 months after the leave year in which it is accrued would not be in breach of the WTD, but that a time limit of 6 months from the end of the relevant leave year would be insufficient and would be in breach.

The ECJ is not obliged to follow the Attorney General’s opinion but it does in the majority of instances.

What remains to be clarified?

Below are the points that still need to be determined:

Whether the right to accrue annual leave, where it cannot be taken due to ill health, is unlimited. This is of particular importance where a worker is off work due to sickness absence for several years so that the accrued liability would be significant, for example, where a PHI scheme is in operation which requires an employee to remain in employment;
Whether the right to carry forward accrued holiday only relates to the 4 weeks’ annual leave granted under the WTD or to the additional 1.6 weeks provided by the WTR as well.

The UK Government issued a Consultation paper in May 2011 proposing changes to the WTR in light of recent case law. The changes proposed will go some way towards clarifying the remaining grey areas. In its consultation paper the Government has proposed that:

The right to accrue annual leave during sickness absence will continue to apply to the full 5.6 weeks annual leave entitlement granted under the WTR in respect to the current leave year;
However, the right to carry forward annual leave that a worker has been unable to take during the leave year due to ill health will be limited and will only apply to the 4 weeks granted under the WTD. A worker would not therefore be entitled to carry forward the 1.6 weeks additional annual leave. The proposals do not however seek to limit the number of years’ accrued annual leave a worker is entitled to carry forward and we will have to await the ECJ’s decision in the case of Schulte for further clarification on this point.

In addition it is proposed that:

Employers will be able to insist that a worker takes any period of untaken annual leave in the leave year in which it is accrued, where there is sufficient time, or to require the worker to carry holiday forward to a new leave year for good business reasons;
A worker’s entitlement to reschedule annual leave that they have been unable to take due to ill health will be limited to the 4 weeks annual leave under Regulation 13 and not the 1.6 weeks additional annual leave granted under Regulation 13A.

The consultation period closed on 8 August 2011 so we should expect to see changes to the WTR by April 2012.

This article has been written by Abigail Trencher, a senior associate with the regional law firm of Birketts LLP, with offices in Ipswich, Cambridge, Chelmsford and Norwich, e-mail abigail-trencher@birketts.co.uk.

It provides only a general summary and is not intended to be comprehensive. Specific legal advice should be taken in any individual application. Law covered as at 11 August 2011. © Birketts LLP 2011.

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