Sickness absence and holiday pay: frequently asked questions
Greg Chambers of Osborne Clarke concludes a series of articles on the implications of the Stringer case on sickness absence and holiday pay with some frequently asked questions that look, in particular, at how Stringer affects the issue of accrual of annual leave during sickness absence and how employers can avoid a build-up of liability for untaken annual leave. There are a number of unanswered questions arising from Stringer, particularly as the House of Lords did not address certain issues outstanding from the European Court of Justice (ECJ) decision. However, pending any further developments in this area, employers can take steps to reduce their potential liability for outstanding annual leave payments by reviewing and amending annual leave and sickness absence policies and procedures.
Do employees continue to accrue statutory holiday entitlement while they are on long-term sickness absence?
Yes. As a result of the ECJ ruling in Stringer and others v HM Revenue and Customs sub nom Commissioners of Inland Revenue v Ainsworth and others; Schultz-Hoff v Deutsche Rentenversicherung Bund [2009] IRLR 214 ECJ, employees who are absent on sick leave continue to accrue entitlement to four weeks' paid statutory holiday under the Working Time Directive (2003/88/EC) and reg.13 of the Working Time Regulations 1998 (SI 1998/1833). This is the case regardless of the length of the sickness absence.
Does the additional 1.6 weeks' leave under reg.13A of the 1998 Regulations continue to accrue during sickness absence?
The Working Time (Amendment) Regulations 2007 (SI 2007/2079) inserted a new reg.13A into the 1998 Regulations, giving employees the right to 1.6 weeks' additional paid leave. However, the ECJ decision in Stringer was limited to the minimum four-week entitlement under the Directive. Whether or not the ECJ decision on accrual will be applied by the courts in relation to the additional 1.6 weeks' leave remains to be seen. The historical approach taken by the courts suggests that it will.
Where there is a contractual holiday entitlement that exceeds the statutory minimum will this also accrue during sickness absence?
Contractual holiday entitlement is unaffected by the Stringer decision. Employers could choose not to allow contractual leave that exceeds the statutory minimum to accrue during long-term sickness absence. Employers that wish to adopt this approach will need to make clear in their contracts and policies that additional contractual annual leave does not accrue during sickness absence. However, administratively it is likely to be easier to treat all annual leave in the same way with regard to accrual. Failure to allow contractual annual leave to accrue during sickness absence may also raise issues of disability discrimination in some cases.
How should employees bring claims for unpaid holiday?
In HM Revenue and Customs v Stringer and others sub nom Commissioners of Inland Revenue v Ainsworth and others [2009] IRLR 677 HL, the House of Lords (to which the case returned following the ECJ decision) ruled that, as well as claiming under the 1998 Regulations, employees could pursue a claim for unpaid holiday under s.13 of the Employment Rights Act 1996, which gives workers the right not to have unlawful deductions made from their wages. This is significant because there are more generous time limits for deductions from wages claims than for claims under the Regulations. Under the Regulations there is a three-month time limit for bringing a claim, which begins with the date on which the alleged exercise of the right should have been permitted. This means that employees soon run out of time to claim for specific failures to pay for annual leave. By contrast, unlawful deductions from wages claims under the 1996 Act can be brought for a whole series of deductions provided that the claim is made within three months of the last in a series of deductions. Therefore, some employees may now be able to recover holiday pay going back several years.
What are the implications of Stringer for an employee whose employment terminates while he or she is on sickness absence?
As a result of Stringer an employee who is on sickness absence continues to accrue the four-week statutory annual leave entitlement. If his or her contract terminates during sickness absence any outstanding untaken holiday must be paid in lieu. If the employer fails to make the payment, the employee may pursue the claim as an unlawful deduction, potentially going back a number of years.
Should employers allow employees to take annual leave during periods of sickness absence?
According to the ECJ decision member states can allow workers to take statutory annual leave during sickness absence, or preclude this where workers can take leave at another time. However, the ECJ also held that if workers cannot take leave due to sickness, their right to leave should not be extinguished. Until there is further guidance from case law, or the 1998 Regulations are amended to clarify this point, it is likely that annual leave liability continues to accrue unless it is taken. Therefore, employers should consider encouraging employees on long-term sickness absence to take their paid annual leave to prevent substantial holiday pay liabilities building up over time.
Can employers insist that employees take holiday while they are on long-term sickness absence?
Some employers might consider requiring employees to take their annual leave entitlement while they are on sickness absence, either by including the requirement as a contractual term or serving employees who are off sick with notice under reg.15 of the Regulations specifying when holiday must be taken. However, whether or not employers can insist that employees take annual leave during sickness absence did not arise in Stringer.
Employers that insist that employees take their leave are likely to antagonise those employees and expose themselves to potential legal claims (for example for disability discrimination and/or constructive dismissal). Although employees who have exhausted sick pay entitlements may welcome the opportunity to take paid annual leave, employees who have sick pay entitlements outstanding may object to being required to take holiday while off sick. Until there is clear authority (either due to a change to the Regulations or as a result of case law) permitting employers to insist that holiday is taken during sickness, employers that adopt this approach could be at risk.
Can leave that is untaken due to sickness absence be carried over into the following leave year?
The ECJ in Stringer held that the right to take annual leave cannot be extinguished where workers are unable to take leave due to sickness absence. However, the 1998 Regulations do not permit the carry-over of statutory holiday, with the exception of the 1.6 weeks' additional leave if a relevant agreement allows. The House of Lords did not address this inconsistency, so this remains an uncertain area. Whether or not the Government will amend the Regulations to address this point remains to be seen.
Employers may set their own rules regarding the carry-over of any holiday in excess of the statutory minimum. Employers may wish to limit how much contractual leave can be carried over, to avoid a build-up of liability. Annual leave policies should make clear how much leave can be carried forward and how much must be taken during the leave year in which it is due.
Should employees be paid in lieu of annual leave that is untaken due to sickness absence?
Under reg.13(9)(b) of the Regulations annual leave cannot be replaced by a payment in lieu, other than when employment is terminated. Following Stringer, employees who have been off sick are entitled, on termination, to claim payment for accrued, untaken holiday even if the entitlement relates to previous holiday years. To comply with the Regulations, while at the same time minimising liability for untaken holiday pay, employers should encourage employees on long-term sickness absence to take paid annual leave, rather than make payments in lieu of holiday entitlement during the course of employees' employment.
How could Stringer affect permanent health insurance schemes?
Following Stringer, it is likely that employees who remain employed while receiving permanent health insurance benefits will be entitled to take, and be paid for, annual leave. Employers that offer permanent health insurance should check the rules of their scheme to ensure that the payment of annual leave will not result in the end of employees' entitlement to permanent health insurance payments. Some insurers may argue that employees who are on annual leave are no longer sick, and are therefore not entitled to payment under the scheme.
Employers could consider drafting (or varying) permanent health insurance policies to make clear that permanent health insurance payments are set off against holiday payments. Employers should also check which party will be responsible for paying any top-up to permanent health insurance payments when annual leave is taken.
Should employers terminate sick employees' contracts earlier than they might have done prior to the Stringer decision?
Stringer has clarified both that annual leave entitlement continues to accrue during sickness absence and that employees can bring claims for unpaid annual leave extending over a period. Therefore it is in employers' interests to avoid allowing sickness absence to extend unnecessarily. As a result employers may wish to terminate contracts at an earlier point than they would previously.
However, an employer that is considering terminating an employee's contract to avoid liability for ongoing annual leave payments should check whether or not permanent health insurance benefits would cease as a result. If they would the termination may be in breach of contract and the employer could face claims for damages. Employers must also take the necessary steps to avoid unfair dismissal and disability discrimination claims.
What should employers do in the light of Stringer?
Employers should amend their policies and procedures to help prevent substantial holiday pay liabilities building up over time. Sickness absence and annual leave policies should make clear that, where possible, employees on sick leave should take holiday during the leave year in which their holiday falls, even if it coincides with a period of sickness absence. Policies should also make clear that employees who wish to take annual leave while they are on long-term sickness absence must request annual leave according to the normal rules. Employers should keep records of the annual leave taken by employees on sickness absence. By taking steps to monitor the uptake of annual leave during sickness absence, employers can assess the potential risks for the future and target their attempts to encourage employees to take their leave.
Sickness absence management procedures should be clear and robust and facilitate a return to work as soon as possible to avoid unnecessarily long periods of sickness absence during which holiday continues to accrue.
The next topic of the week article will be the first in a new series on defending tribunal claims and will be published on 7 September.
Greg Chambers (greg.chambers@osborneclarke.com) is a solicitor with Osborne Clarke.
Further information on Osborne Clarke can be accessed at www.osborneclarke.com.