UK: Holiday Pay, Sick Leave and PHI Benefits

Last Updated: 25 November 2010
Article by Robert Hill, Nick Dent and Adam Lambert

A Scottish tribunal has held in Souter v Royal College of Nursing Scotland that an employee on long-term sick leave was not entitled to carry over her holiday to the following leave year and, in any event, because she had received the permanent health insurance (PHI) benefits she was entitled to, she had not suffered any loss. Although it cannot be guaranteed that a future tribunal would adopt the same approach, this is still a helpful case for employers.

The facts

Mrs Souter, an administrative assistant, worked for the Royal College of Nursing (RCN) from September 1996. She was on long-term sick leave from 7 November 2001 until her retirement on 21 April 2010. From 7 November 2002, she received PHI benefits of approximately half her salary. In March 2010, Mrs Souter enquired about her entitlement to holiday pay while she was on sick leave. The RCN informed her that she was only entitled to holiday pay in respect of the final holiday year (1 January to 21 April 2010), which she received on the termination of her employment. In May 2010, Mrs Souter brought a claim for unlawful deduction of wages in respect of unpaid statutory holiday pay for the period she was on sick leave.

The background

Unlawful deduction of wages

The House of Lords held in HM Revenue & Customs v Stringer (2009) that a claim for unpaid statutory holiday pay under the Working Time Regulations 1998 could be brought as an unlawful deduction of wages claim under the Employment Rights Act 1996. The time limit for bringing such claims is within three months of the last in a series of deductions.

The Working Time Regulations

Regulation 13(9)(a) provides that annual leave "may only be taken in a leave year in respect of which it is due".

The ECJ held in Stringer and in Pereda v Madrid Movilidad (2009) that the Working Time Directive requires workers on sick leave to be permitted to carry holiday leave into the next leave year. These decisions are incompatible with regulation 13(9)(a). In our bulletin "Employees on sick leave carry over holiday" (March 2010), we reported on the case of Shah v First West Yorkshire Limited. In Shah, it was held that, to comply with the Regulations and to be consistent with the ECJ's decision in Pereda, wording should be added to regulation 13(9)(a) so that a worker on sick leave who is unable to take holiday within the relevant leave year can carry that holiday over to the next leave year. The effect of Shah was to make the Pereda decision impact on the private sector.

The tribunal's decision

The tribunal in Mrs Souter's case found that, in view of the fact that Mrs Souter had been paid in respect of her untaken holiday for the final leave year, the last in the series of alleged holiday pay deductions related to the previous leave year, which ended on 31 December 2010. Mrs Souter's claim was brought more than three months after that date. The tribunal held that her claim was brought out of time.

Although the claim was time-barred, the tribunal went on to consider the merits of the case. It did not refer to the decisions in Shah or, somewhat bizarrely, Pereda. It found that Mrs Souter's claim would not have succeeded in any event on the grounds that:

  • the RCN, as a private sector employer, was not bound by the ECJ's decision in Stringer and, therefore, in accordance with regulation 13(9)(a), Mrs Souter could only take holiday in the holiday year in respect of which it was due. The tribunal noted that Mrs Souter had not requested holiday and had not been prevented from taking holiday by the RCN. Indeed, her evidence was that her medical condition was such that she would not have been able to take holiday; and
  • she had suffered no financial loss. The tribunal found that when a worker starts to receive PHI benefits, their contract is effectively varied, to provide for a lower "salary" in the form of PHI benefits. The worker's statutory holiday pay will therefore be at the rate of the PHI benefits they receive, and not their original salary. Mrs Souter had received the full amount of PHI benefits, and had not lost any holiday pay. The tribunal stated that her position was no different from a worker who had not been on sick leave but had not exercised their right to take holiday, and would have no claim for loss of holiday pay.

The implications

While this decision will be welcomed by employers, it should be treated with some caution. It is just a tribunal decision which is not binding on tribunals, and may not be followed by the EAT or a higher court. While the significance of this case is devalued because, in reaching its decision, the tribunal did not consider Pereda, this does not impact on the decision in its entirety. Clearly, Pereda is pertinent to its finding in relation to whether a worker on sick leave can carry over their holiday entitlement to the next holiday year, but not to the other conclusions that the tribunal reached.

Until there is a decision from the EAT or a higher court on the issues raised in this case, employers who do not wish to pay an employee on long-term sick leave for all untaken holiday should consider paying the employee, on termination of their employment, for untaken statutory holiday in respect of the final leave year only. This will at least afford them an argument that any subsequent claim for unlawful deduction of wages is time-barred.

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.

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