With differences between European and domestic law, and a substantial body of, sometimes conflicting, case law, it's hardly surprising that employers view the whole topic with trepidation.
Whilst there are some areas where clarification as to the correct legal position is still awaited, it is important for employers to follow best practice. It may be of some comfort to know the Government plans to legislate to bring certain provisions of the Working Time Regulations in line with European case law. This should reduce some of the confusion currently muddying the waters.
Do I have to reschedule holiday due to sickness?
In summary, yes you should allow the rescheduling of holiday.
The ECJ held in Pereda v Madrid Movilidad SA that where a worker's prearranged statutory holiday coincides with a period of sick leave, the Equal Treatment Directive requires that the worker has the option to take the leave at an alternative time. Accordingly, if the worker remains sick until the end of the relevant leave year, the Directive requires them to be allowed to reschedule their holiday in the next leave year.
Although it's true that under the Working Time Regulations (the WTR) workers are not allowed to reschedule statutory holiday or carry it over to the next leave year, Courts and tribunals are obliged, if possible, to interpret the WTR in the light of Pereda.
As a result of this employers are advised to allow the rescheduling of holiday when it can't be taken due to sickness. However, it's a good idea to put in place measures to prevent abuse. These could include making sure that workers are only entitled to statutory sick pay if they turn holiday into sick leave; obliging workers to report sickness to their manager and requiring medical evidence for longer absences; recording and monitoring sickness absence; and only paying sick pay if the worker is unfit to do the job - the fact that a worker cannot "enjoy" their holiday need not be treated as sick leave.
Can I prevent employees taking holiday during sick leave?
No.The WTR do not prevent workers taking statutory holiday while they are off sick. Indeed, it is possible for employers to issue a counter-notice to prevent a worker taking holiday on the dates they have requested. However, this is not without risk. It is not advisable for an employer to do this if the worker is unlikely to return to work in the current leave year. This is because the employer will almost certainly be in breach of the WTR if it uses the counter-notice rules to prevent the worker from exercising their holiday rights before the leave year ends.
Do I have to let workers carry over holiday to the next leave year?
In a nutshell, yes. Regulation 13(9) WTR expressly prohibits carry-over of holiday. However, the ECJ in Stringer and ors v HM Revenue & Customs confirmed that, under the Directive, workers on sick leave must continue to accrue holiday rights and, if workers are prevented from taking their holiday because of sickness, they must be allowed to take it following their return to work, even if this means carrying it over to the next leave year. Later, in Pereda, the ECJ held that workers may choose not to take their holiday whilst they are off sick, and they must be allowed to carry leave over to the next leave year, if required, so as not to lose their entitlement.
The WTR should, therefore, be interpreted in line with the ECJ decisions in Stringer and Pereda. Employers should allow their workers to carry over any unused statutory holiday entitlement to the next leave year if they have been unable to use it due to sickness.
Does holiday have to be taken or requested for an entitlement to holiday pay to arise?
If you want to play it safe, yes.
There is a measure of uncertainty surrounding whether a sick worker needs to put in a request for annual leave during the relevant leave year in order to carry over the right to take leave or to be paid for it.
There are two recent conflicting EAT decisions. In NHS Leeds v Larner it was held that a worker on long-term sick leave for a whole year who was not well enough to exercise her "right to enjoy a period of relaxation and leisure" (i.e. make a request to take holiday) should be allowed to carry over her holiday entitlement to the next leave year. However, in Fraser v South West London St George's Mental Health Trust the EAT said that a failure to request leave meant that the right expired at the end of the leave year. The judgement in Fraser came from the President of the EAT and so is likely to stand for the moment. However, it is worth noting that Larner is due to be heard by the Court of Appeal in March. If employers want to play it safe then they should allow carry-over to be ongoing, rather than insisting that carry-over is only allowed if the worker actively requests it.
Can I avoid a potentially costly ongoing liability for holiday pay?
To a certain extent, yes. Employers who have workers on sick leave who have not taken any statutory holiday for a number of years are potentially liable for significant sums in respect of their statutory holiday pay entitlement.
In HM Revenue & Customs v Stringer the House of Lords held that holiday pay can be the subject of unlawful deduction from wages claims under the ERA 1996 so unpaid holiday pay over a period of several years may be recoverable. Although the WTR provides that a worker's entitlement to take statutory holiday expires at the end of the relevant leave year, the WTR should probably be interpreted in line with the ECJ decisions in Stringer and Pereda. It follows that if a sick worker does carry over their entitlement to take statutory holiday then they will also carry over their right to be paid in respect of that holiday.
A claim for a deduction from wages must be brought within three months of the last in a series of deductions. As a result a worker can, in principle, recover holiday pay spanning several leave years.
There are two potential options for breaking a series of deductions. The first is to ensure that the worker takes their statutory holiday for the current leave year, and making the appropriate payments in respect of that holiday. The second is, on termination of employment, to make the appropriate payment in lieu of the current leave year's accrued but untaken holiday.
In Khan v Martin McColl and Souter v Royal College of Nursing Scotland it was held that the payment for untaken holiday made to the employees on termination could be based only on the current leave year. In doing this the chain in the series of deductions had been broken. However, in Horne v Dawn Meats (UK) Ltd the tribunal held that the payment for untaken leave should be based on all untaken leave, and not just that which remained untaken in the year of termination.
Although the position remains far from clear the recent ECJ decision in KHS AG v Schulte may provide some comfort. Here it was held that there is a limit to the length of time an employee on long-term sick leave can continue to carry over untaken statutory annual leave. In view of the fact that there seems to be no right to an unlimited carry-over of holiday it makes little sense if holiday pay is treated differently.
Will workers on PHI benefits be entitled to full holiday pay?
This isn't as clear cut as it may seem. In Khan v Martin McColl the tribunal pointed out that if a sick worker in receipt of PHI takes paid holiday, the benefits may be lost (depending on the policy's terms), and also commented that there would be an element of unjust enrichment if a worker on long-term sick leave were able to cease claiming under a PHI policy in order to claim holiday that he or she had carried over, possibly for several years.
Meanwhile it was held in Souter that when a worker started receiving PHI benefits there was a permanent arrangement that she would not return to work. As a result her contract was varied to provide for this new, lower salary level funded by the PHI insurers, and any statutory holiday taken while receiving PHI benefits would be calculated with reference to those benefits.
However, in Millard v Roland J Bull the tribunal took a different view, holding that, if an individual in receipt of PHI benefits is a worker, then he/she should be entitled to take and be paid for annual leave just like any other worker. As this accords with the reasoning in Stringer, employers may wish to consider paying those on PHI for their full contractual (ie pre-ill health) annual leave entitlement.
It can be seen from our quick little jaunt through this constantly evolving area, that there are still many uncertainties and points to be resolved.
The Government proposes to amend the WTR so that where a worker has been unable to take their annual leave due to sickness absence, or falls sick during scheduled annual leave, and it is not possible to reschedule the leave in the current leave year, they will be able to carry it over into the following leave year. Meanwhile, it is to be hoped that further clarification will come from future caselaw. Needless to say, we'll keep you updated!
Emma Burrows, partner, Trowers & Hamlins