Difficult holiday entitlement issues
In this article we examine the latest case law and legislative developments regarding holiday entitlement, with the aim of clarifying the position on a number of issues that cause particular difficulty for employers.
Introduction
Managing requests for
holiday
- leave
under the Working Time Regulations
- contractual provisions for holiday
entitlement
Holiday entitlement and
religious discrimination
- observing public
holidays
- refusing leave for religious holidays
Part-time workers' holiday
entitlement
- part-time workers and public
holidays
- additional leave under the Working Time
Regulations
Rolled-up holiday
pay
Holiday and long-term sickness
absence
Sickness while on
holiday
Holiday entitlement and
maternity leave
Holiday entitlement
on termination
Perhaps the most straightforward provision in the Working Time Directive (2003/88/EC) is that in art. 7 relating to annual leave. Under this provision, all workers are entitled to at least four weeks' paid annual leave, which may not be replaced by an allowance in lieu "except where the employment relationship is terminated". Other provisions in the Directive are covered by wide-ranging derogations and exceptions, but this entitlement applies to all workers covered by the Directive, without exception.
The Directive is implemented in the UK by the Working Time Regulations 1998 (SI 1998/1833). Holiday entitlement is governed by regs. 13 to 16, which set out how leave is to be taken, how holiday pay should be calculated, and leave entitlement in workers' first year of employment. The Regulations have been the subject of a considerable amount of case law, and a number of key issues in the management of holiday entitlement continue to cause difficulty. One complicating factor is that holiday entitlement is also covered by the contract of employment, and the interaction between contractual and statutory entitlement is not always straightforward.
This article does not seek to explain the provisions of the Working Time Regulations in full. Rather, it focuses on a number of key issues that have caused employers particular concern since the Regulations came into force. It also considers issues that arise in relation to holiday under discrimination law and looks at part-timers' holiday entitlement.
It should be noted that the amount of statutory annual leave to which workers are entitled will increase from four weeks to 5.6 weeks over a period beginning on 1 October 2007 and ending on 1 April 2009. The "additional" leave is intended to provide a total holiday entitlement equivalent to four weeks plus public holidays.
Managing requests for holiday
One of the key concerns for employers is to ensure that workers take holiday at a time that does not unduly interfere with the operation of their business. It may be that there are certain times of year when it is difficult for an employer to accommodate leave, or when it needs to prevent too many workers from taking holiday to ensure that the business continues to operate effectively. The employer may also wish to ensure that minimum notice of holiday is provided to allow arrangements for cover to be made.
Leave under the Working Time Regulations
Regulation 15 of the Working Time Regulations governs the dates on which leave may be taken. It allows both worker and employer to give notice specifying the dates on which leave is to be taken.
The worker seeking to take leave must give notice to the employer twice as many days in advance of the first day of leave as he or she is seeking to take on that occasion (reg. 15(4)(a)). In other words, if the worker is seeking to take one day off, he or she must give the employer two days' notice. If the worker is seeking to take 10 days off, he or she must give the employer 20 days' notice. Thus, an individual who works five days a week and wishes to take a fortnight's leave - 10 days off work - beginning on 1 October 2007 must give the employer notice of this on 11 September at the latest.
There is no requirement that the notice be in writing: what matters is that the employer is given the notice at the correct time, and that the days on which the leave is to be taken are specified.
The employer is not obliged to permit the worker to take the leave to which the notice relates. Under reg. 15(2)(b) the employer can issue a notice to the worker requiring that leave not be taken on particular days. This notice must be given at least as many days in advance of the first day of proposed leave as the worker is seeking to take (reg. 15(4)(b)). In our example of a worker seeking a fortnight's holiday from 1 October 2007, the worker will not be entitled to take the leave if the employer gives notice of this by 21 September. Effectively, this counter-notice amounts to a right on the part of the employer to refuse any individual request for leave.
Employers can also require workers to take leave on particular days (reg. 15(2)(a)). For example, an employer might wish to close the workplace at a particularly quiet period of the year - perhaps during the summer or between Christmas and New Year. Provided that workers are given notice of this, the employer can require them to use part of their annual holiday entitlement to cover the closure. Such notice must be given at least twice as many days in advance of the first period of leave as the number of days' leave specified. A closure for a fortnight would require 20 days' notice for individuals working five days a week or 24 days' notice for those working a six-day week.
This provision would also allow an employer to specify that certain days in an employee's notice period should be taken as holiday. If, for example, an employee gives four weeks' notice of resignation, the employer could give two weeks' notice that one week of that period should be taken as holiday, thus reducing the payment in lieu of leave that the employee would be entitled to receive on expiry of his or her notice.
Again, there is no requirement for the notice of leave to be given in writing: what matters is that it is given to the worker at the correct time, and that the days covered are specified. However, for the avoidance of misunderstandings and arguments, a written notice is clearly the best option.
Contractual provisions for holiday entitlement
In practice, the detailed provisions above merely provide the fallback position. Under reg. 15(5) they can be varied or excluded by a "relevant agreement". A relevant agreement is defined in reg. 2(1) as: a workforce agreement (an agreement made with worker representatives under Sch. 1 of the Regulations); the provisions of a collective agreement that are incorporated into a contract between the worker and the employer; or "any other agreement in writing [that] is legally enforceable as between the worker and his employer".
This means that an employer can specify the appropriate procedures for requesting and approving holiday in the contract of employment itself. Setting out a procedure in a staff handbook may not, however, be sufficient. A relevant agreement (other than a workforce or collective agreement) must be a legally binding agreement made in writing. There must, therefore, be some evidence not just that the employer has issued the procedure, but also that individual workers have agreed to it.
Notwithstanding this limitation, it is open to a relevant agreement to specify any rule about the taking of annual leave. It could, for example:
- require employees to give four weeks' notice, or
longer, to take a period of leave;
- provide for leave requests to be submitted on a given
form or to a specified person;
- rather than provide for notice and counter-notice,
require all leave requests to be approved by a specified manager;
- reserve the employer's right to cancel leave at short
notice;
- set out given days in the year - such as public
holidays - when leave must be taken;
- limit the amount of leave that can be taken in any given period, eg no more than two weeks' leave during the summer months, or no more than two weeks' leave for any period of holiday.
A carefully drafted relevant agreement can give the employer almost complete control over how and when paid leave is taken. Of course, holiday entitlement is a key benefit for employees, so the extent to which an employer would want to hold all the cards in this way will depend on the nature of the business and the employee relations climate in which it operates.
Employers should remember that the overriding requirement is that each worker receive four weeks' annual leave (plus the additional leave being phased in from 1 October 2007). While employers can refuse individual requests for holiday, they cannot do this in such a way as to prevent the worker from taking the leave to which he or she is entitled before the end of the leave year.
Holiday entitlement and religious discrimination
A feature of most religions is the observance of specific festivals and holidays when adherents are likely to want to take time off work to celebrate. The Working Time Regulations make no special provision for religious holidays, but the way in which an employer allocates holiday and manages requests to take holiday may well be affected by the Employment Equality (Religion or Belief) Regulations 2003 (SI 2003/1660).
Observing public holidays
One question often raised by employers is whether or not non-Christian employees can be required to take holiday entitlement to cover public holidays such as Christmas and Good Friday that are based on the Christian calendar. Another is whether or not additional holiday must be provided for those who wish to observe Hindu or Muslim holidays, for example.
Such concerns are probably misplaced. It is difficult to see how giving someone a day off work with full pay can amount to less favourable treatment or detriment. There may be an argument to the effect that someone who is Muslim, for example, must use his or her general holiday entitlement to take a religious holiday and is required to take leave on a day, such as Good Friday, when he or she might otherwise choose to be at work. This could, theoretically, amount to indirect discrimination. However, an employer should not have any difficulty in establishing the defence that such a practice is a proportionate means of achieving a legitimate aim. The discriminatory impact of the practice would be marginal at best, and the employer could argue that staying open on a day when most customers and suppliers were closed would not be a practicable option.
Nor could it be argued that non-Christians should be given additional holiday entitlement to cover their own religious holidays. This would result in more favourable treatment for certain religious groups, and amount to unlawful direct discrimination.
Refusing leave for religious holidays
Employers should, however, take care to avoid indirect discrimination in the way in which they approve or refuse requests for holiday. For example, Muslim employees are likely to regard it as particularly important to take a day off work to celebrate the festival of Eid Ul Fitr at the end of the holy month of Ramadan. Refusing a request to take such leave would certainly operate to the disadvantage of Muslim employees and would therefore amount to potential indirect discrimination. The refusal would be lawful if the employer could show that it was a proportionate means of achieving a legitimate aim. However, to justify refusing a day of leave that held such importance for the employee in question would require a compelling business need. This might be that the day is a particularly important one for the business (year end, for example) or that the employee performs a key role and it is not possible to arrange cover in time.
Problems may also arise where a large number of employees share a faith and need to take time off on the same day. In general, an employer will be entitled to set a limit on the number of employees who can be granted a day off, if this is necessary to keep the business functioning. Some employers with large numbers of employees from particular faith groupschoose to observe a general holiday for key religious festivals, but it is highly unlikely that a tribunal would require this.
The key point is that employers should make real efforts to accommodate requests for time off to observe religious holidays, but if it is genuinely not possible to grant such a request this will not necessarily amount to unlawful discrimination.
Part-time workers' holiday entitlement
The Working Time Regulations make no special provision for part-time workers. The rule that all workers are entitled to four weeks' leave applies to part-timers in exactly the same way as it does to full-timers. An employee working five days a week is entitled to 20 days' annual leave under the Regulations - four weeks of five days each. A part-timer working three days a week is entitled to 12 days' annual leave - four weeks of three days each.
Part-time workers and public holidays
An issue that has now been dealt with by case law is the extent to which a part-timer's holiday entitlement must take account of public holidays. Many employers give paid leave in respect of public holidays only if they fall on one of the employee's normal working days. Because four out of the eight public holidays in England and Wales always fall on a Monday, such a rule operates to the disadvantage of part-time workers who do not work on Mondays.
It had been argued by many that the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551) would require employers to provide part-time workers with pro rata holiday entitlement for public holidays. However, that argument has been rejected by the Court of Session. In McMenemy v Capita Business Services Ltd [2007] IRLR 400, the Court held that, although a part-time worker who did not work on Mondays was disadvantaged when compared to a full-time worker in relation to holiday entitlement, this less favourable treatment was not "on the grounds" that the worker was a part-timer, as required by reg. 5(2)(a). Mr McMenemy did not receive paid holiday in relation to certain bank holidays because of the particular pattern that he worked, which did not include Mondays, not because he was part time. The Court accepted that a part-timer who worked on Mondays would have received time off in relation to the public holidays that Mr McMenemy missed.
It therefore seems fairly clearly settled that an employer can operate a rule whereby paid time off for public holidays is provided for only those workers who would ordinarily be working on those days. However, many employers already provide a pro rata public holiday entitlement for part-timers, and if these arrangements form part of the contract of employment - which is highly likely - they will continue to be bound by them.
Additional leave under the Working Time Regulations
The introduction of additional leave begins in October 2007 (see The introduction of additional annual leave), and by April 2009 all workers will be entitled to an extra 1.6 weeks' leave on top of the standard four weeks. This is designed to ensure that all workers are entitled to four weeks' leave plus leave for public holidays - although there is no requirement that the additional leave be taken on public holidays.
This additional leave will affect the position of part-timers. Take the example of a part-timer who works Wednesday to Friday each week, and whose holiday entitlement is four weeks plus those public holidays that fall on his or her normal working days - an arrangement found to be lawful by the Court of Session in McMenemy. In 2006, the part-timer would have been entitled to 12 days' normal leave (four weeks at three days a week) plus paid time off in respect of just one public holiday (Good Friday). When the additional leave comes into effect fully, giving an additional 1.6 weeks' leave, the worker will be entitled to 12 days' normal leave plus an additional 4.8 days to cover public holidays. Employers that currently adopt the rule approved by McMenemy will therefore have to increase their part-timers' holiday entitlement.
Rolled-up holiday pay
When the Working Time Regulations were introduced in 1998, many employers adopted a practice already common in, for example, the construction industry of "rolling up" holiday pay into workers' normal hourly rate. Under this system a worker's normal hourly rate is expressed as including an additional amount (usually around 7%) to cover holiday pay. When the worker actually takes holiday he or she is not paid, the theory being that the additional elements that have already been paid as part of the normal hourly rate cover the holiday.
Following conflicting decisions in the UK as to whether or not such a system complies with the requirement to provide paid leave, the European Court of Justice (ECJ) has now held that it does not. In Robinson-Steele v RD Retail Services Ltd and other cases [2006] IRLR 386, it held that the provision of paid holiday is a particularly important principle of Community law, from which there can be no derogation. The Directive is intended to ensure that paid leave can actually be taken by workers and, although it does not specify precisely when payment in respect of leave must be made, it is necessary that, when taking leave, a worker is in a position "as regards remuneration" that is comparable with a period of work. The ECJ also stressed that the right to paid leave cannot be replaced by a payment or allowance in lieu of leave. Rolled-up holiday pay effectively amounts to a payment in lieu of paid leave and is not compatible with the Directive.
It follows that any practice whereby workers are not paid as normal when they take leave, but instead receive "holiday pay" in instalments over the course of the year, will be unlawful and amount to a failure to provide paid annual leave in accordance with the Regulations.
Some confusion has been caused, however, by a further comment made by the ECJ that there is nothing in the Directive that prevents sums paid in addition to normal remuneration being "set off"against payment for specific leave. Some commentators have read this as essentially allowing rolled-up holiday by the back door: an employer could argue that, although leave has not been paid, the worker has received the equivalent payment through the "rolled-up" element, and that this can be set offagainst the holiday pay that is being claimed.
However, this is unlikely to be the outcome. The ECJ was clear in its decision that "member states are required to take the measures appropriate to ensure that practices incompatible with art. 7 of the Directive are not continued". The UK courts must therefore provide a remedy for a failure to allow proper paid holiday. Even if an employer could show that a "rolled-up" element was a genuine additional payment that could be offset against the holiday pay due, it would still be open to a tribunal to award compensation to reflect the fact that the worker had not been given proper entitlement to paid leave.
Whatever the measure of that compensation, rolled-up holiday pay systems do not comply with the Working Time Regulations and should not be operated by employers.
Holiday and long-term sickness absence
One issue that remains unresolved is the extent to which workers are entitled to take paid holiday when they are off sick. The Working Time Regulations do not provide any definition of annual leave and do not make any reference to periods of long-term illness. They simply provide that all workers are entitled to four weeks' annual leave in each leave year.
In Kigass Aero Components Ltd v Brown [2002] IRLR 312, the EAT held that, even when a worker was off sick, he or she remained an employee and was entitled to annual leave in accordance with the Regulations. It followed that a worker on long-term sick leave who had exhausted all contractual sick pay was entitled to take annual leave and would be entitled to be paid in full for it. Further, a worker who was dismissed during long-term sickness absencewas entitled to be paid for holiday accrued but not taken, even if the worker had been off sick for the whole of the relevant holiday year at the time of the dismissal.
However, in Commissioners of Inland Revenue v Ainsworth and others [2005] IRLR 465, the Court of Appeal held that Kigass had been wrongly decided. In concluding that a worker on long-term sickness absence was entitled to annual leave, the EAT in Kigass had focused too much on the definition of "worker" and had failed to address the meaning of "leave". To take leave it was necessary for the worker to be freed from an obligation to attend work - and an employee on long-term sickness absence was under no such obligation. The Court of Appeal also held that a worker who is dismissed after having been off sick for the whole of the holiday year is not entitled to any payment for leave accrued but not taken.
This ruling - if it stands - would seem to mean that a worker who is off sick cannot simultaneously take annual leave. This may seem to be common sense, but the Court of Appeal decision leaves a number of important issues open. As we explore in more detail below, an employee who is dismissed is, under reg. 14, entitled to be paid in respect of holiday that has not been taken. In calculating the amount due, the starting point is the amount of leave to which the worker is entitled under reg. 13. The Court of Appeal held that no payment is due when the employee has been absent for the whole of the holiday year, but the only way to make that fit with reg. 14 is to adjust the amount of leave to which the worker is entitled under reg. 13 so that, instead of four weeks, it is none.
Does this mean that the amount of annual leave entitlement under reg. 13 can be reduced as a result of sickness absence? The consequence of this would be that a worker who returns to work after being absent for the first six months of the holiday year would be entitled to take only two weeks' annual leave on his or her return. There is no provision for such a reduction in entitlement in the Regulations, and perhaps the better view is that, whatever the position on termination, an employee's minimum holiday entitlement is not reduced by absence. This means that an employee who returns to work at any stage in the holiday year should be entitled to his or her full statutory holiday entitlement, even if this needs to be squeezed into a relatively short period of time.
The employees in Ainsworth appealed to the House of Lords, which has referred the matter to the ECJ under the new name of HM Revenue and Customs v Stringer and others. Clarity from the ECJ would clearly be welcome.
It must be stressed that Ainsworth is relevant only to holiday entitlement under the Working Time Regulations. In so far as an employer provides holiday in excess of this minimum, the question of how the extra entitlement is affected by sick leave is a matter for the contract of employment. The employer is free to specify that leave over and above the statutory minimum does not accrue during periods of sickness absence.
Sickness while on holiday
Some employers have specific rules in place governing what happens when an employee falls sick before, during or immediately after annual leave. For example, it is common for an employer's sick pay policy to require a doctor's note in respect of any period of sickness that immediately follows a period of annual leave. This is to guard against employees' seeking to extend their holiday, or cover for transportation delays or jet lag by calling in sick on the day on which they are due back to work.
In general, an employer is free to impose such restrictions, or to stipulate additional reporting requirements in such circumstances. Should the evidence show that the employee has called in sick under false pretences, this will be a disciplinary matter that could well amount to gross misconduct justifying dismissal.
There is sometimes an expectation that an employee whose holiday is ruined by illness should be able to take sick leave and defer the annual leave to a later date. An employer may choose to allow this but, in the absence of a contractual provision, there is no entitlement. Once a period of holiday has been agreed, the question of whether or not the employee feels well and has a good time during that period is irrelevant.
The situation is more difficult when an employee falls ill immediately before taking a period of holiday. Suppose an employee has booked a two-week holiday starting at the beginning of September, but is hospitalised during the last week in August. Can the employee cancel the leave that has been booked and take it at a later date, taking advantage of the employer's sick pay scheme in the meantime? In such circumstances, many employers would want to treat the employee sympathetically and would allow the holiday to be postponed, whatever the legal position. However, determining the legal position is not straightforward.
Holiday procedures do not generally give employees a right unilaterally to cancel periods of holiday that have been booked - although it is common for arrangements to be changed with the consent of the employer. On the face of it, an employer could therefore insist that, as the holiday has been booked, it has to be taken. It may be, however, that Ainsworth is relevant in this situation. An employee who falls ill is not required to be at work, and in Ainsworth the Court of Appeal held that "leave" meant a release from what would otherwise be an obligation. Accordingly, an employee who is already relieved of the obligation to work as a result of illness cannot take "leave" within the meaning of the Regulations. If this is correct, it could be argued that an employee who falls ill before taking leave that has been booked cannot take leave as long as he or she remains ill.
This would apply only in relation to the leave required by the Working Time Regulations. Where an employer provides leave in addition to this, it will be permissible for it to insist that such leave is taken at the time booked.
Holiday entitlement and maternity leave
In the UK, maternity leave is divided into two consecutive periods of 26 weeks; ordinary maternity leave (OML) and then additional maternity leave (AML). During OML an employee is entitled to the benefit of all the terms and conditions of employment (other than remuneration) that would have applied had she not been absent - reg. 9(1)(a) of the Maternity and Parental Leave etc Regulations 1999 (SI 1999/3312). Thus, it is generally accepted that contractual holiday entitlement continues to accrue during the period of OML.
By contrast, during AML, an employee is entitled to the benefit of only the duty of mutual trust and confidence, compensation in the event of redundancy, the application of disciplinary and grievance procedures and the right to notice (reg. 17(a)). It would therefore seem that contractual holiday entitlement does not accrue during AML.
These provisions are complicated by the Working Time Regulations, which provide that all workers are entitled to four weeks' paid leave each year (reg. 13) (and, from 1 October 2007, additional leave (reg. 13A)). Since this is a statutory entitlement, it does not depend on the terms and conditions that are applicable to the worker in question, so cannot depend on whether the worker is on OML or AML. Where, for example, a woman whose employer's leave year runs from January to December returns from 52 weeks' maternity leave in September, the four weeks' holiday for that year will need to be squeezed in before the end of the holiday year in December.
The situation is more complicated where the employee is away for the whole of the holiday year - or at least for the latter part of it. The Working Time Regulations are clear that holiday entitlement cannot be deferred into the following holiday year. But does this mean that if an employee goes on maternity leave part of the way through the year, without having taken any holiday, she loses her holiday entitlement when the year ends?
The nearest we have to a case on this issue is Merino Gómez v Continental Industrias del Caucho SA [2004] IRLR 407, in which the ECJ considered the application of the annual leave entitlement under the Working Time Directive to periods where the worker is on maternity leave. Ms MerinoGómez worked in a factory where a collective agreement required a certain proportion of the annual leave entitlement to be taken between June and the beginning of September. Under the applicable Spanish provisions, she was entitled to 16 weeks' maternity leave, and began her maternity leave in May 2001. She returned to work on 24 August 2001 and sought to take annual leave during September, but her request was refused.
Applying principles of sex discrimination, the ECJ held that a worker must be entitled to take her annual leave during a period other than the period of maternity leave. Accordingly, Ms Merino Gómez should have been allowed to take her annual leave when she returned from maternity leave, even if this meant it would fall outside the period for taking annual leave for the rest of the workforce.
The logical conclusion to draw from this is that an employer cannot use the fact that an employee has been on maternity leave to prevent her from taking annual leave to which she is entitled under the Working Time Regulations. One option would be for employers to allow employees to take paid annual leave during a period of otherwise unpaid additional maternity leave. However, the principle in Ainsworth apparently rules out this possibility, as a woman on maternity leave is already under no obligation to come to work.
In practice, when the woman in question is on maternity leave for the latter part of the holiday year, many employers simply allow any leave that has not been taken to carry over into the following year. This is difficult to reconcile with the provisions of the Working Time Regulations - but it seems to be a pragmatic solution that carries less legal risk than informing the employee that she has lost her holiday entitlement. We await clarification from the courts on this issue.
Holiday entitlement on termination
The Working Time Regulations specify that, if a worker's employment is terminated, he or she will be entitled to a payment representing holiday that has not been taken. Under reg. 14(3)(b) the formula for calculating this payment is (A x B) - C, where:
- "A" is the period of leave to which the worker is
entitled under reg. 13 (and reg. 13A from October 2007);
- "B" is the proportion of the worker's leave year that
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.
The period of leave under reg. 13 is always four weeks - subject to the question mark raised over this by Ainsworth (see above).
To take a straightforward example, if a worker leaves exactly six months through the holiday year, having taken one week's holiday, the payment due will be one week's pay:(4 x 0.5) - 1 = 1.
There is no qualifying period for a payment under reg. 14, meaning that the right to be paid in lieu of holiday that has not been taken can apply to very short-term assignments. Suppose a temporary worker is directly engaged by an employer for one week, after which the engagement is terminated. Technically, he or she will be entitled to a payment on termination as follows: (4 x 0.01923 (1/52)) - 0 = 0.07692. If the worker is paid £250 per week, this will give an entitlement to holiday pay on termination of £19.23. In principle, there is no reason why the same formula cannot be applied to engagements that last a day or less.
This formula is, however, only a fallback. Under reg. 14(3)(a) the sum payable on termination is "such sum as may be provided … in a relevant agreement" (see above for discussion of what constitutes a "relevant agreement"). This gives the employer complete discretion to agree any formula it chooses for payment in lieu of holiday that has not been taken. There is no requirement that the payment be even broadly equivalent to the payment that would be made under the formula provided in reg. 14(3)(b). Indeed, there is no requirement that the payment is in any way proportionate to the amount of leave remaining on termination. On the face of it, if the contract of employment provided for a payment of £1 on termination to represent holiday that had not been taken, that would comply with the Regulations.
There must, however, be a payment. In Witley and District Men's Club v Mackay [2001] IRLR 595, the contract of employment provided that there would be no payment in lieu of leave made if the employee was dismissed for dishonesty. The EAT held that it was not open to the employer to pay nothing in respect of holiday that had not been taken on termination, regardless of the reason for the dismissal. Many employers would wish to deny payment of holiday that has not been taken in cases of dismissal for gross misconduct, but this is not an option. The contract of employment may specify a greatly reduced payment in these circumstances, but it must provide for a payment.
