UK: Holiday And Sickness Issues Back In The Spotlight

The recent EAT case of Fraser v Southwest London St George's Mental Health Trust has put the relationship between holiday/holiday pay and sickness absence back in the spotlight. This case concluded that employees on long term sick leave must formally give notice to take holiday during the relevant holiday leave period if they want to preserve their right to it. A failure to give notice to take holiday in the normal way would result in the individual forfeiting the right to the holiday entitlement and to any holiday pay for it.

Although this case is welcome news for employers worried about the prospect of claims for accrued holiday pay over long periods of sickness it also reminds us that the interaction between holiday entitlements and sickness absence remains complicated and often confused. The key questions are (i) can holiday be carried over when there is long term sickness absence, and if so, how long for? and (ii) what is an employer's ongoing liability for holiday pay when holiday has not been taken because of sickness?

This lawnow summarises the current position on statutory holiday, the key issues affecting employers and looks at what can be expected in the future.

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The recent EAT case of Fraser v Southwest London St George's Mental Health Trust has put the relationship between holiday/holiday pay and sickness absence back in the spotlight. This case concluded that employees on long term sick leave must formally give notice to take holiday during the relevant holiday leave period if they want to preserve their right to it. A failure to give notice to take holiday in the normal way would result in the individual forfeiting the right to the holiday entitlement and to any holiday pay for it.

Although this case is welcome news for employers worried about the prospect of claims for accrued holiday pay over long periods of sickness it also reminds us that the interaction between holiday entitlements and sickness absence remains complicated and often confused. The key questions are (i) can holiday be carried over when there is long term sickness absence, and if so, how long for? and (ii) what is an employer's ongoing liability for holiday pay when holiday has not been taken because of sickness?

This lawnow summarises the current position on statutory holiday, the key issues affecting employers and looks at what can be expected in the future.

The Working Time Directive (originally 1993) ("the Directive") provides that every worker is entitled to paid annual leave of at least 4 weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and other practice. The Working Time Regulations 1998 ("WTR") implemented the Directive into UK domestic legislation. However the WTR also increased the annual holiday entitlement for workers to 5.6 weeks (which includes bank and public holidays) and amongst other provisions included a requirement that statutory holiday of 4 weeks must be taken in the relevant leave year and may not be replaced by pay in lieu except when the worker's employment had terminated (regulation 13(9)), - effectively creating a principle of "use it or lose it". The additional 1.6 weeks holiday may be carried forward to the next leave year, subject to agreement between the employer and worker.

Can an employee on sick leave carry holiday over to the next leave year?

This issue has been the subject of several significant judicial decisions since 2009. In Stringer V HMRC [2009] IRLR 214 the ECJ overruled a decision of the Court of Appeal by stating firstly that workers can take paid holiday whilst off work due to long term sick leave. It also held that workers who were prevented from taking holiday during a leave year due to sickness should be allowed to carry over such holiday entitlement and that accrued holiday must be paid in lieu on termination.

Another ECJ decision, Pereda v Madrid Movilidad SA [2009] IRLR 958 extended this principle. In that case Mr Pereda had been injured shortly before he was due to take pre-arranged holiday leave. Not only did the ECJ hold that a worker was entitled to take holiday during sick leave, it stated that the worker was entitled to request to substitute an alternative period of leave which did not coincide with a period of sick leave.

These decisions seem to conflict with UK law and it is not clear whether the WTR can be read consistently with the ECJ decisions to allow for statutory holiday to be carried over in the UK. Fraser-v- Southwest London St George's Mental Health Trust considered this issue but did not expressly clarify that the WTR allows holiday to be carried forward. However, in coming to its decision it implied that it did. What Fraser stated was that Pereda would not assist an employee who did not give notice to take holiday leave.

In order to reconcile this conflict the UK Government's Consultation on Modern Workplaces (which closed in August 2011) proposes amending the WTR so that workers are able to carry over the 4-week statutory holiday entitlement to the following leave year if they cannot take it during the current year. This would maintain the current position in relation to the additional 1.6 weeks holiday entitlement, i.e. that that can only be carried over with agreement between the employer and worker.

Can a worker carry holiday forward beyond the next leave year?

The ECJ and UK cases above consider the specific issue of whether holiday can be carried forward to the next leave year. What also needs to be considered is whether holiday can be carried forward beyond the next leave year.

One of the UK cases to consider this is the Employment Tribunal case of Adams v Harwich International Port ET/1503085 (June 2011). The employment judge upheld the position that words could be read into the WTR to enable workers to carry over holiday where they had been unwilling or unable to take it due to sickness. However, the judge also stated that he did not think that sick workers should be able to accumulate and carry over holiday year on year indefinitely. In a further twist to this the judge held that sick workers are entitled to carry over all of their 5.6 week entitlement under the WTR, not just the 4 weeks provided for by the Directive. This is a first instance case, and therefore only limited weight can be attributed to it.

The ECJ has not yet pronounced on this issue, although there has been an Advocate General's Opinion in KHS AG v Schulte C-214/10 in July 2011. Here the AG has stated that a national law under which annual holiday entitlement cannot be carried over more than 18 months after the end of the relevant holiday year would be compatible with the Directive. The Opinion then stated that a carry-over period of 6 months would probably be sufficient. The ECJ judgment, which is not obliged to but usually follows the AG's Opinion, is awaited with interest.

What is an employer's on-going liability for holiday pay?

Employers often have workers on long term sick leave who have not taken any holiday for some time, perhaps even several years. If holiday can be carried over this could result in a very expensive payment of accrued holiday on the eventual termination of employment of the worker.

The first question is likely to be on what basis a claim for accrued holiday pay would be made out. The two potential rights of recourse available to employees are either under Regulation 30 of the WTR or a claim for unlawful deduction from wages under the Employment Rights Act 1996. Although a Regulation 30 claim must be brought within 3 months of a specific non-payment, a claim for unlawful deduction from wages can be brought within 3 months of the last of a series of deductions, thereby potentially allowing such a claim to span a number of years. The question is then what holiday a worker is entitled to be paid in respect of on termination of employment.

The EAT has considered the issue in several different cases, coming to different conclusions (albeit on different facts) so that there is no real clarity on the issue. In the cases of List Design v Douglas [2003] IRLR 14 and Canada Life Ltd v Gray [2004] ICR 73 the EAT concluded that holiday pay does not depend on any holiday actually being taken. However the EAT in Kigass Aero Components v Brown [2002] ICR 697 took a different (but essentially obiter) view and stated that there is no right to holiday pay where the right to take holiday has not been exercised in the holiday leave year. On this basis, if a worker wishes to exercise his accrued or accruing right to holiday he has to give his employer notice specifying the days on which the leave is to be taken and he has to give that notice in good time before the leave is required to begin.

A subsequent EAT case, NHS Leeds v Larner [2011] IRLR 894, came to a different conclusion. In a short judgment it held that a worker who had been on sick leave for an entire year and had not taken any holiday during that period was entitled to a payment in respect of that year's unused statutory holiday entitlement on the termination of her employment. The fact that she had not requested holiday during the relevant holiday leave year did not mean that she lost the right to payment. Larner is currently the subject of an appeal to the Court of Appeal and a decision is expected sometime between December 2011 and April 2012. It is hoped that this will result in a binding authority on this issue.

In the meantime, the Fraser case supports Kigass and has a detailed judgment. It decided that the cases of List Design and Canada Life were wrong and that payment should only be made for leave actually taken. Fraser also considered the implications of Pereda. In doing so the EAT stated that, as far as the Directive is concerned, a worker on sick leave can either take statutory holiday (and be paid in respect of it) or request for that holiday to be deferred. The EAT noted that if Mrs Fraser had requested to defer taking her statutory holiday until her return to work the Trust might have been obliged to accede to that request. However, as she made no such request under the WTR her statutory holiday lapsed at the end of the year. However Fraser is only another EAT case and so does not overrule the other EAT cases, although the judgment was given by the Honourable Mr Justice Underhill, the President of the EAT, and so may be more persuasive.

Summary

The current position on carry-over of holiday and holiday pay in respect of employees on sick leave is wholly unsatisfactory for employers trying to determine what their employees' entitlements are.

At present the WTR does not expressly provide for an employee's statutory entitlement to holiday to be carried forward in circumstances where they have been unable to take it during the current leave year. However, subject to the outcome of the current consultation, it seems likely that the WTR will be amended to allow employees to carry-over their 4-week statutory holiday entitlement (in line with the Directive) into the next leave year, and given the current line of ECJ and UK cases on this issue employers should proceed on the basis that this is the case.

Whether employees will be allowed to carry this holiday forward to subsequent years, and in what circumstances, is less certain and we will have to wait the outcome of the ECJ Schulte case and the UK Larner case for guidance on this issue. However, pending the outcome of these cases employers can take some comfort from the decision in Fraser that they are not obliged to pay employees holiday pay on termination of employment for holiday that the employee has not given notice to take, or for which they have not made a request for that holiday entitlement to be deferred.

It should be remembered that the case law above, and therefore the conclusions drawn from it, refers to statutory holiday and not an employee's entitlement to contractual holiday. In respect of contractual holiday entitlement over and above the statutory entitlement, an employer will have more flexibility with regard to how it can manage the granting, taking and payment in lieu of it.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 16/11/2011.