UK: Still Sick of the Working Time Regulations? - Where are we now after the decisions in Stringer and Pereda?

A talk to the Employment Lawyers Association

In Birmingham on 26 May 2010

INTRODUCTION

1. Where are we now after the decisions in Stringer and Pereda? I posed this question almost exactly six months ago in a talk given to ELA members in London. At the time I took the view that the question would have different answers for different groups of people. Employers might be worried. Employees might be optimistic. Lawyers hoped to be busy. What was and undoubtedly remains true is that the decisions of the ECJ and the House of Lords answer a number of questions, sidestep others and pose still more.

2. Six months on, surprisingly little has been clarified. My own experience suggests that many employers and employees have preferred to settle what are often low-value claims rather than risk the uncertainty of appellate litigation.

3. This talk will consider:

STATUTORY PROVISIONS

The Rights

4. The starting point must be the Directive.¹ The Regulations were enacted in order to implement the Directive and must be construed so as to give effect to its spirit and intention. Article 7 provides:

7.1 Member states shall take the measures necessary to ensure that every worker is entitled to be paid annual leave of at least four weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice.

7.2 The minimum period of paid annual leave may not be replaced by an allowance in lieu, except when the employment relationship is terminated.

5. This very broad obligation has been given effect by means of regulations 13 to 17 of the Working Time Regulations 1988.

6. The right to take annual leave is derived from Article 13(1):

Subject to paragraph (5),² a worker is entitled to four weeks' annual leave in each year.

7. The period of four weeks leave has been extended by regulation 13A to provide for a further 1.6 weeks (from 1 April 2009 – or 0.8 weeks from 1 April 2008). This is intended to allow the worker four weeks statutory leave in addition to the eight statutory bank holidays. This provision is not derived from the Directive but it is likely that it will be treated in the same way by the Courts.

8. Crucially, regulation 13(9) provides that:

Leave to which a worker is entitled under this regulation may be taken in instalments, but-

(a) it may only be taken in the leave year in respect of which it is due, and

(b) it may not be replaced by a payment in lieu except where the worker's employment is terminated.

9. Regulation 17 provides:

Where during any period a worker is entitled to... annual leave both under a provision of these regulations and under a separate provision (including a provision of his contract), he may not exercise the two rights separately, but may, in taking... leave during that period, take advantage of whichever right is, in any particular respect, more favourable.

10. The employee can thus elect whether to rely on contractual or statutory entitlements, but cannot separately claim both so as to double her entitlement.

11. As to the amount of pay, regulation 16 provides that a worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulations 13 and 13A at the rate of a week's pay in respect of each week of leave; the starting point being that there should be no loss of basic pay by reason of taking annual leave.³

12. As to the dates of the leave, regulation 15 provides that the worker may elect when to take leave (by giving notice pursuant to regulation 15(1)), subject to the right of the employer to give notice (pursuant to regulation 15(2)) requiring leave to be taken (or not taken) on specific days.

13. Finally, regulation 14 provides for payment in lieu of annual leave not taken at the date of termination of employment.

14. Note that "worker" is defined widely by regulation 2 as:

"an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment..."

The Remedies

15. Regulation 30 provides that the remedy for a failure to allow the employee to take annual leave to which they are entitled is that the tribunal:

(a) shall make a declaration to that effect;

(b) may make an award of compensation to be paid by the employer to the worker.⁴

16. The amount of the compensation is what the tribunal considers to be just and equitable in all the circumstances having regard to the employer's default in refusing to permit the worker to exercise his right and any loss sustained by the worker.

17. The remedy for failing to make a payment in respect of periods of annual leave under regulations 14 or 16 is that the tribunal,

shall order the employer to pay to the worker the amount which it finds to be due to him.⁵

18. Thus the remedy for failing to allow the worker to take leave is by way of compensation to be assessed; the remedy for failing to pay is by way of an order to repay a debt.

BACKGROUND – EARLIER CASE LAW

19. Before the decision in Stringer, the EAT had grappled on a number of occasions with the question of when a worker could claim arrears of holiday pay. For reasons identified below, the cases are of more than historical interest.

20. In List Design v Cantley ⁶ and Canada Life v Gray ⁷ the EAT held (in the context of claims under regulation 16) that,

"it is unnecessary for actual holiday to be taken to claim arrears of holiday pay".

21. The EAT in Kigass Aero Components v Brown⁸ found that,

"an entitlement to annual leave arises under reg. 13(1) if a claimant is or has been a "worker" during the whole or part of a leave year. Nothing more is required. There is no requirement that in order to be a "worker" some work needs to have been done. There is no express provision in the Regulations that annual leave is, and is only, leave to be absent from what would otherwise have been "working time".

22. However, it went on to conclude that the right to claim holiday pay only accrued when the leave was applied for and "duly taken". That conclusion is plainly inconsistent with List Design and Canada Life.

23. These decisions have been subjected to less judicial scrutiny than they might have been since a large number of claims were stayed behind Stringer, which was heard in the Court of Appeal in 2005.⁹ The EAT's decisions will no doubt be revisited in the near future, and almost certainly by the Court of Appeal. I consider them further below.

STRINGER IN THE ECJ

24. The case was referred to the ECJ before it came before the House of Lords and decided the crucial questions whether a worker is entitled to paid annual leave while on sick leave; and correspondingly whether she is entitled on termination to pay in lieu of annual leave untaken while on sick leave.

25. The Court began by noting that

"the entitlement of every worker to paid annual leave must be regarded as a particularly important principle of Community social law from which there can be no derogations..."

26. The significant weight which the Court attaches to the right is reflected in the Court's approach in both Stringer and Pereda (see below). Moreover it reflects earlier case law – see in particular R v Secretary of State for Trade & Industry ex parte BECTU¹⁰ (qualifying period for entitlement to annual leave unlawful) and Merino Gomez v Continental Industrias del Caucho SA (right to take annual leave at a time other than during maternity leave).¹¹ The ECJ stressed that the worker is entitled to "actual rest, with a view to ensuring effective protection of his health and safety."

27. The Court contrasted the purposes of annual leave (rest, relaxation and leisure) with the purpose of sick leave (recovery from being ill). It concluded that, while it may be permissible for workers to be prevented from taking annual leave while on sick leave, that can only be done where the worker is given the opportunity to take the annual leave at a later date. Furthermore, while it may be possible for the right to annual leave to be lost at the end of a leave year, that is subject to the proviso that the worker who has lost his right to paid annual leave has actually had the opportunity to exercise the right conferred on him by the Directive.

28. Crucially, the Court held that,

"the right to paid annual leave conferred by Directive 2003/88 itself on all workers... cannot be made subject by a member state to a condition concerning the obligation actually to have worked during the leave year laid down by that state."

29. This is of potentially very great significance because it suggests that Stringer might apply not only to cases of sickness absence but to other cases where the employee is not in fact at work.

30. In summary the ECJ held:

(i) The entitlement to annual leave is not affected by sickness absence. The worker is not required actually to have worked during the leave year.

(ii) A worker off sick throughout the year in which his or her employment terminated is therefore entitled to her payment in lieu in full.

(iii) Annual leave may be taken at a time when the worker is off sick.

(iv) Legislation may prevent workers from taking annual leave during periods of sickness, but only if the worker has the opportunity to take the leave after the return to work (for example by allowing the worker to carry over leave to the following year). It is equally acceptable for a worker on sick leave to take paid annual leave during that sick leave, rather than carry it over.

STRINGER IN THE HOUSE OF LORDS

31. The task of the House of Lords was considerably simplified by the ECJ's decision. Little or no consideration was given to the question whether the claimants were entitled to payment under the WTR, the parties having agreed that, following the ECJ's decision, employees are entitled to take annual leave while off sick. It was agreed by the parties that regulation 13(9) was consistent with the Directive because, although it does not permit carry over of leave, the alternative of allowing paid annual leave during sick leave was permitted (see 29(iv) above). This issue was not the focus of argument in the Lords, but has resurfaced following Pereda (see below).

32. The remaining problem was whether a failure to make such payments constituted an unauthorised deduction from wages for the purposes of section 13 ERA 96. The House of Lords concluded that payment for annual leave (and payment in lieu of annual leave on termination) amounted to wages for the purposes of section 27 ERA, and that any deduction thereof fell within section 13.

33. It follows that a complaint about a failure to make payments in these circumstances may be brought to the tribunal either under regulation 30 of the WTR or under section 23 ERA. The advantage of the latter is that the limitation provisions in section 23(3) are more generous in that they allow a claim to be brought within 3 months of the last of a series of deductions, thus potentially extending liability over a much longer period. The question of time limits is dealt with below.

PEREDA

34. Mr. Pereda was employed by the organisation responsible for towing away illegally parked vehicles in Madrid. He was off sick during his period of annual leave. He asked to take his annual leave at another time and was refused. On the basis of Stringer, which concluded that there is no bar to taking annual leave and sick leave at the same time, that was on the face of it a permissible approach. The ECJ disagreed.

35. Relying on Stringer, the Court reiterated the different purposes of sick leave and annual leave. It went further however:

It follows from the foregoing and, in particular, from that stated purpose of the entitlement to paid annual leave 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...¹²

where that worker does not wish to take annual leave during a period of sick leave, annual leave must be granted to him for a different period.¹³

36. The Court further held that if the request for annual leave could not be accommodated in the same leave year, it might have to allow leave in a subsequent leave year.

37. Plainly, this approach was not anticipated by the parties or the House of Lords in Stringer. It seriously calls into question regulation 13(9)(a). I return to this question later.

38. The effect of the Stringer and Pereda, taken together is that the employee on sick leave has a choice. He cannot be required to take his annual leave while sick. Most employees, no doubt, will choose to take annual leave at a later date. The employer can refuse to grant particular dates, but must allow the leave to be carried over if necessary. The employee off on long-term sickness absence will continue to accrue annual leave throughout. Having said that, an employee who has exhausted her entitlement to sick pay may prefer to take annual leave while on sick leave in order to obtain pay for that period.

39. Save that the employer retains some control over timing, the power to choose when to take and when to carry over annual leave lies, in cases of sickness absence, with the employee.

THE FUTURE OF THE REGULATIONS

40. As set out above, it is difficult to see how regulation 13(9)(a) can survive Pereda. The ECJ have held that if necessary, leave must be carried over. Regulation 13(9)(a) makes this requirement impossible.

41. Further difficulties arise with regard to regulation 14 in terms of the way in which the payment in lieu of annual leave is calculated. The formula set out at regulation 14(3)(b) provides only for leave in the final leave year. It is impossible, by this mechanism, to take into account leave carried over from previous years:

(3) The payment due ... shall be-- ...

(b) ... a sum equal to the amount that would be due to the worker under regulation 16 in respect of a period of leave determined according to the formula--

(A x B) - C

where--

A is the period of leave to which the worker is entitled under regulation 13 and regulation 13A;

B is the proportion of the worker's leave year which expired before the termination date, and

C is the period of leave taken by the worker between the start of the leave year and the termination date.

42. Where the employer is a public authority, there is a good argument to say that regulation 13(9)(a) should be disapplied. In the case of private sector employees, there is a theoretical possibility of bringing a Francovich claim, although this may not be an attractive option given the complexities of such a claim and the relatively small sums involved. The ECJ in BECTU ¹⁴ observed that,

Article 7(1) of [the Directive] imposes a clear and precise obligation on member states to achieve a specific result by virtue of which they are to "take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks.

43. Although this clearly suggests that Article 7.1 has direct effect, the Court of Appeal in British Airways v Williams ¹⁵ reached the opposite conclusion (the case has since been to the Supreme Court,¹⁶ which did not find it necessary to rule on this issue, but made a reference to the ECJ on others). The uncertainty may well be enough to persuade the majority of employees that they are better served by a claim against their employer.

44. Another possibility is that, in the absence of any amendment, the Courts may attempt to interpret the regulations imaginatively so as to make them consistent with the Directive as it is now understood to be (as recently illustrated by the decision of the EAT in Attridge Law v Coleman¹⁷), for example by reading in words such as, "save where the worker has through ill health not had the opportunity to take that leave within the leave year".

45. I am aware of one example of a case in which precisely this approach was taken – the ET decision of Shah v First West Yorkshire Ltd (EJ Forrest, Leeds, 20.11.09). The EJ construed regulation 13(9)(a) by adding:

"Save where a worker has been prevented by illness from taking a period of holiday leave, and returns from sick leave, covering that holiday leave, with insufficient time to take that holiday leave within that leave year; in which case, they must be given the opportunity of taking that holiday leave during the following leave year."

46. Sadly the case was not appealed (no doubt, as ever, due to the low value of the claim) so we remain without guidance from the EAT on this issue.

47. It might be said that this tortuous formulation demonstrates perfectly why this is a rather unsatisfactory approach; and why, given the clear terms of Pereda, the Regulations ought not to survive without being amended. However, the last government plainly had other priorities and the new one may well do too. That being so, this imaginative interpretation may be the only option.

48. Finally, it should also be noted that it may be possible to prevent a worker from taking their full entitlement to leave if an application is made at the end of the leave year and the employer rejects the application (for example for operational reasons) by means of a regulation 15(2) notice. The IDS Handbook on Working Time suggests that,

"Employers would not be able to use a notice requirement effectively to defeat a worker's entitlement to annual leave in any given leave year."

But in Lyons v Mitie Security Ltd ¹⁸ the EAT took a different view, and remitted the issue to the tribunal for consideration on the facts.

OTHER KINDS OF ABSENCE

49. Stringer and Pereda are limited to cases of sickness absence. Workers may be absent from work for all sorts of other reason, however. The most obvious examples are perhaps career breaks, unpaid leave and disciplinary suspensions. It remains unclear whether the same approach should be taken to these kinds of leave. There is a good argument to say that it should – in particular given the ECJ's conclusion that the right to annual leave is not conditional upon the worker's actually having worked during the period.

50. Perhaps the most interesting of these types of absence is the career break, not least because of its increasing use. It also presents a useful point of analysis since the idea of annual leave while on a career break is instinctively odd. Yet taking into account the approach taken by the ECJ in both Stringer and Pereda, it is difficult to escape the conclusion that annual leave may well continue to accrue during many career breaks.

51. The starting point must be consideration of whether an employee on a career break is a "worker" for the purposes of the WTR (see regulation 2, cited above). The key question is whether the individual "has entered into or works under" a contract of employment during the career break.

52. There is no requirement to work on a career break so the claimant cannot be said to "work under" a contract of employment. The key question, then, is whether the individual has "entered into" a contract of employment. One approach might be that on going on career break the contract of employment comes to an end, to be superseded by a new contract governed by the terms and conditions of the employer's career break policy. Those terms would include the right to re-enter the contract of employment at the end of the career break but would not constitute a contract of employment.

53. There is little reported authority relating to the question as to whether a contract of employment continues during a career break. One of the few reported cases is Curr v Marks & Spencer plc [2003] IRLR 74, in which the Court of Appeal considered whether the claimant's contract of employment continued during a career break for the purposes of continuity of employment. The Court concluded that it is necessary to look at the terms of the career break agreement in order to understand the position. It found (as had the ET and EAT) that there was no contract of employment during the career break. Indeed it went further and held that there was no arrangement to preserve continuity for the purposes of section 212(3)(c) ERA. Peter Gibson LJ expressed the appropriate test as follows:

"There must be mutual recognition by the arrangement that the ex-employee, though absent from work, nevertheless continues in the employment of the employer..."

54. It was stressed that all the circumstances had to be considered; in the particular case those of greater importance included that Ms Curr had been required to resign, lose her staff benefits and pay off a housing loan. Other factors taken into account were that the break was (apart from the periods during which she would have to return to work) unpaid; that the restriction on other work was limited to a requirement of prior consultation, and that the right to return to work after the break imposed no obligation on the employee to do so.

55. It will be a question of fact in any particular case whether the claimant was "under a contract of employment" at the relevant times. If she is, she will be treated as a "worker" for the purposes of the WTR. If she is so treated, I think that it will be difficult to argue that the statutory entitlement to annual leave does not apply, in particular given the ECJ's view that there is no requirement that the worker has actually performed any work during the period in question.

56. Arguably such a reading would conflict with the purpose of the Directive, since it would be likely to discourage employers from allowing career breaks; or would encourage them to make the terms of such breaks more unfavourable. Nevertheless, that appears to be the effect of the ECJ decisions to date. It remains to be seen how this issue is dealt with in the appellate courts here – and in the ECJ – when it arises, as it surely will.

57. Stringer and Pereda are all the more likely to apply in cases of shorter absences such as unpaid leave and suspensions. The worker will continue to be under a contract of employment and will continue to accrue annual leave. Pereda may indeed assist employers in these types of circumstance in that it makes explicit their ability to determine the timing of annual leave.

LITIGATION ISSUES

Time Limits

58. As set out above, a complaint about a failure to make payments in respect of annual leave may be brought either under regulation 30 WTR or under section 23 ERA. The significant advantage of the latter is that the limitation provisions in section 23(3) are more generous than those in the ERA.

59. Section 23(3) provides:

Where a complaint is brought under this section in respect of—

(a)     a series of deductions or payments, ...

the references in subsection (2) to the deduction or payment are to the last deduction or payment in the series or to the last of the payments so received.

60. This permits a claim to be made within three months of the last of a "series of deductions". By contrast, the time limit under the WTR is three months from the beginning of the period from which the period of leave would have begun.

61. The issue of time limits was dealt with by the House of Lords in Stringer only in part. It considered claims under regulations 14 and 16 WTR, and held (as set out above) that such claims can be brought as claims for unauthorised deductions under the ERA. But it did not deal with claims under regulation 13 alleging a refusal to permit annual leave to be taken at all. This is an issue which is likely to arise in many claims.

62. From an employee perspective, it is perhaps bizarre to suggest that a claim for non-payment of holiday pay attracts a different, and much more generous, time limit that than a claim for refusal to allow the holiday to be taken at all. Indeed it may be that tribunals take the same instinctive view. The most effective means to avoid the difficulties posed by the shorter time limit is by use of the older EAT decisions in List Design and Canada Life to frame the claim under regulation 16 rather than regulation 13.

63. If the EAT was right in the earlier cases to conclude that

"it is unnecessary for actual holiday to be taken to claim arrears of holiday pay",

it must be arguable that arrears can be claimed as a debt, whether the holiday was taken (or even applied for) or not. If on the other hand the correct approach is that of Underhill J in Kigass Aero – that arrears are only recoverable when leave is "duly taken", the arrears may not be so taken.

64. It is not clear whether the EAT, if faced with this approach today, would follow List Design and Canada Life or Kigass Aero. There is an argument that only in List Design was this conclusion part of the ratio, such that it is the decision which ought to be followed.

65. On the other hand, employers will argue that a claim under regulation 13 is quite different in nature from the sort of claim covered by the ERA. It is essentially a claim for compensation for loss of amenity (taking also into account the default of the employer) rather than for recovery of wages owed. It is not, of its nature, capable of being treated in the same way. Indeed regulation 30 WTR itself characterises claims under regulation 13 differently from claims under regulations 14 and 16:

(1) A worker may present a complaint to an employment tribunal that his employer--

(a) has refused to permit him to exercise any right he has under--

(i) regulation ... 13 or 13A;...

or

(b) has failed to pay him the whole or any part of any amount due to him under regulation 14(2) or 16(1).

66. The Court of Appeal in Coors Ltd v Adcock¹⁹ drew a distinction between claims for liquidated sums (which are capable of being dealt with under the ERA) and claims for unliquidated damages to be assessed, which it found were not. Wall LJ summarised the position as follows:

Part II of ERA 1996, as I read it, is essentially designed for straightforward claims where the employee can point to a quantified loss.

67. In all, there is a good argument that the shorter time limit applies to regulation 13 claims. The battleground may well be over attempts by claimants to characterise such claims as regulation 16 claims. My own view is that the List Design approach is simply inconsistent with the structure of the legislation, which provides for two different kinds of remedy depending upon whether the leave has been taken or not. But as in many respects on this topic, it may well prove to be the claimants who have the upper hand here.

68. It is also necessary to consider the position of the employee who did not apply to take annual leave (in many cases arguing that she was unaware of the right to take it, or actively discouraged by a policy preventing it). Is she precluded from claiming for untaken leave on the basis that she never asked to take it? Much will depend on the outcome of the inevitable case in which the EAT (followed, no doubt, by the Court of Appeal) is asked to prefer either List Design or Kigass Aero. The employer's argument is not an attractive one, all the more so where the employee was aware that his application would be rejected. But as a matter of strict interpretation, it is difficult to see why a claim for refusal to allow annual leave should succeed in circumstances where the annual leave was never requested.

69. Finally it is necessary to consider what is likely to be treated as a "series of deductions" for these purposes. A fairly generous approach tends to be taken (see, for example Group 4 Nightspeed v Gilbert²⁰.) In most cases it is likely that the deductions will - of their very nature - be made on the same basis and for the same reasons. I would expect few Respondents to succeed by showing that the deductions do not form part of a series, but all will depend upon the facts of the case.

Remedies

70. Claims under regulations 14 and 16 will be relatively straightforward to quantify. A claim under regulation 14 may include claims for earlier years if the claimant has remained off sick for a long period of time.

71. As for claims under regulation 13, it is far from certain what is the appropriate measure of compensation. The employee will have suffered no pecuniary loss, but will have suffered loss of amenity. It is not clear whether regulation 30(4)(b) envisages compensation for loss of amenity – there seems no reason why it should not. What is clear is that the employer's default may be taken into account (see Miles v Linkage Community Trust Ltd.²¹), although in most cases there will be no element of bad faith.

CONCLUSIONS

72. Stringer and Pereda raise more questions than are dealt with in this talk. The answers will not be known until the EAT, the Court of Appeal and possibly the ECJ have given us their views. In the meantime, these are interesting times for those advising both employers and employees. The need for a good holiday has never been greater...

Footnotes

1. Directive 2003/88/EC

2. Which provides for leave for part of a year being dealt with on a pro rata basis

3. This provision is in most cases straightforward; but may not be where supplementary payments (e.g. flying bonuses for airline pilots) are made depending upon the activity undertaken – see British Airways v Williams [2010] UKSC 16 – the issue has been referred to the ECJ.

4. Regulation 30(3)

5. Regulation 30(5)

6. [2003]IRLR 14

7. [2004] ICR 673

8. [2002] IRLR 312

9. Ainsworth v Commissioners of Inland Revenue [2005] EWCA Civ 441; [2005] IRLR 465

10. Case C-173/99; [2001] IRLR 559

11. Case C-342/01; [2004] IRLR 407

12. Paragraph 22

13. Paragraph 25

14. See above

15. [2009] EWCA Civ 281; [2009] IRLR 491

16. [2010] UKSC 16

17. EAT, 14 July 2009

18. [2010] UKEAT 0081/09/CEA

19. [2007] EWCA Civ 19; [2007] IRLR 440

20. [1997] IRLR 398

21. [2008] IRLR 602

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.