The European Court of Justice's (ECJ) ruling on questions referred by the House of Lords in Stringer v HMRC confirms workers taking sick leave are entitled to accrue paid annual leave. The impact that this judgment will have in the UK will depend on the way in which the House of the Lords interprets the Working Time Regulations (WTR) 1998 (which implement European law on annual leave), in light of this judgment. But whatever the outcome of this case, holiday pay is an additional cost that employers will have to bear when employees take sick leave. In the current economic climate, this is another reason for employers to consider what steps can be taken to mitigate the cost of sick leave.
What impact will the decision have on employers in the UK?
- To give effect to the ECJ's ruling, paid annual leave accruing during sickness absence must either:
(a) be taken by the employee at the same time as his sick leave; or
(b) be taken by the employee on his return to work; or
(c) where the employee does not return to work at the end of a period of sickness absence, be paid to the employee in lieu
- The Working Time Regulations currently prohibit employees from carrying statutory leave entitlement over from one holiday year to the next, and the Court of Appeal has previously ruled employees cannot take holiday at the same time as sickness absence. It is not therefore clear how the UK courts will apply the ECJ's ruling to the application of the WTR and it is likely that an amendment to these regulations will be required.
- Public-sector employees can directly enforce the ruling against public employers in the UK so these employers should immediately allow employees to carry over leave from one year to the next, where they have been unable to take it due to sickness absence.
- In the private sector, the prohibition on carry-over of annual leave, and the Court of Appeal's decision that employees cannot take holiday during sick leave still stand, but employers can prepare for anticipated changes to the law in this area.
The two main ways employers can reduce the additional cost of sick leave are by reducing employees' contractual entitlement to sick pay; and reviewing the continued employment of employees on long-term sick leave.
But employers need to consider:
Contractual sick pay entitlement
- Weigh up the benefits of a generous contractual sick pay entitlement as a recruitment tool (generally less important in the current job market) against the disadvantages.
- Generous contractual sick pay entitlements can act as a disincentive for employees to return to work. This can be a particular issue where disciplinary proceedings or attempts to manage the employee are contemplated.
- Most contractual sick pay schemes provide that employees are entitled to sick pay for certified sickness absence, and it is difficult for employers to look beyond this to determine whether or not sick pay will be paid.
- Even where contractual sick pay entitlement is limited, employers can make additional payments on a discretionary basis. To preserve the employer's right to exercise discretion it is important that payment decisions are made on a case by case basis.
- Introducing reduced sick pay entitlement is straightforward for new recruits but contractual changes for existing employees can only be made with the employees' consent. If this is not obtained, employees can resign and claim constructive dismissal and/or claim breach of contract. Consent is likely to be easier to obtain if other benefits (for example, bonus payments for 100% attendance) are offered.
Reviewing employees on long-term sick leave
- Previously, employees who had exhausted their contractual entitlement to sick pay could be retained for little cost. Indefinite accrual of holiday pay changes this position.
- Consider what steps can be taken to actively manage the employee's absence from an early stage. This will involve holding regular meetings with the employee as part of a capability process and seeking medical reports.
- Where it is established that an employee will not or is unlikely to be able to return to work, take steps to terminate the employment, rather than let it continue indefinitely.
- If the employee has a disability under the Disability Discrimination Act, care should be taken not to terminate employment for discriminatory reasons and reasonable adjustments to help the employee return to work or continue performing his role must be considered.
- Consider which benefits are covered under PHI insurance and whether these include paid annual leave. If they are not, employers could be required to make additional payments in respect of this.
Other leave: a reminder
The ECJ's judgment only applies to statutory leave entitlement under the EWTD, which is four weeks per year for an employee working full time. In the UK, annual paid leave entitlement will increase to 28 days per year (inclusive of eight public holidays) from April, but it appears that accrual of additional entitlement to annual leave during sick leave can be excluded by employers.
Employees on maternity/paternity leave are entitled to continue to accrue annual leave entitlement. The ECJ has specifically ruled that, unlike during sick leave, employees cannot take paid annual leave entitlement during maternity leave. Changes to legislation in the UK in October 2008 mean that employees can no longer be restricted to accruing their statutory entitlement to leave only during additional maternity leave and may instead also accrue any additional contractual entitlement throughout.
Gemma Parker is employment associate at European law firm Taylor Wessing LLP
