Sickness absence and holiday pay: practical implications of Stringer

Julian Hemming of Osborne Clarke continues a series of articles on sickness absence and holiday pay with a look at the practical implications of the Stringer case for employers. Employers may need to review sickness absence polices and take steps to manage sickness absence to reduce liability for untaken holiday pay. The first article in the series gave an overview of the case and its impact.

The decisions of the European Court of Justice (ECJ) (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) and the House of Lords (HM Revenue and Customs v Stringer and others sub nom Commissioners of Inland Revenue v Ainsworth and others [2009] IRLR 677 HL) in this case potentially benefit employees who are on long-term sick leave and who, as a consequence, have been unable to take their full statutory holiday entitlement at any time during the relevant holiday year. Hopefully, this will be a small number of employees. If an employer has a significant number of employees in this category, it should conduct an audit to establish the reasons why and consider how to prevent this happening in the future.

While the ECJ decision was limited to a worker's right to carry forward four weeks' holiday under art.7 of the Working Time Directive (2003/88/EC) or to receive a payment in lieu on the termination of employment, reg.13A of the Working Time Regulations 1998 (SI 1998/1833) gives workers a right to a further 1.6 weeks' annual leave (more can be provided for by their contract of employment). One of the questions left unanswered is whether or not the ECJ decision will be applied by the UK courts and tribunals to the additional 1.6 weeks' leave entitlement. The historical approach taken by the courts and tribunals suggests that it is likely that it will.

As a consequence of the ECJ decision, reg.13(9)(a) of the Working Time Regulations 1998 will have to be amended because it limits workers to taking leave in the year in which it is due, which is contrary to the ECJ decision.

When dealing with employees who are on long-term sickness absence, employers should consider the following practical issues.

Sickness absence policies

A sickness absence policy should make clear that, where possible, employees on sick leave should continue to take annual holiday in the leave year in which their holiday falls even if it coincides with a period of sickness absence.

While such a policy could be open to challenge, it would at least encourage absent employees to take holiday rather than accrue it to claim later. However, the taking of holiday during sick leave will require the employer to consider the employee's entitlement to pay during the holiday period. Statutory sick pay and any additional contractual sick pay should be suspended while the employee is in receipt of holiday pay.

If the financial impact of paying for accrued but untaken holiday is significant, employers should review the length of time they commit to paying contractual sick pay over and above statutory sick pay. Policies that provide for long periods of contractual sick pay may be too generous in the light of this case and should be reviewed.

Amending sickness absence policies as outlined above may limit the employer's exposure to significant claims on the termination of employment, but employers that want to reduce contractual sick pay should consider carefully the legal implications of varying an employee's contract. The cost of potential compensation claims for unpaid holiday following Stringer could add weight to the employer's justification for making changes.

Stringer provides a timely reminder that employers should manage sickness absence firmly and should have robust policies that encourage employees to cooperate in the process of investigating whether or not a return to work is possible. Employers should take steps to facilitate a return to work, for example by considering alternative roles and flexible working options. This will assist employers in limiting the build up of annual leave and the expense that could now accompany it.

Payments in lieu of untaken holiday

A clear outcome of the Stringer case is that employees whose employment is terminated following long-term sickness absence can take advantage of s.23 of the Employment Rights Act 1996 to claim a payment in lieu of untaken holiday as a "deduction from wages". This gives them the advantage of having three months from the last in a series of "deductions" to bring their claim (as opposed to three months from each deduction under the Working Time Regulations 1998). For how long they can claim is less clear, but up to six years in arrears seems likely as this is the limitation period for claims for breach of contract and for asserting a statutory right.

Carrying forward holiday

The Stringer decision does not resolve the issue of whether or not employees who are absent on sick leave and then return to work can carry forward statutory holiday accrued during an entire holiday year spent off sick. The carrying forward of statutory holiday is currently precluded by reg.13(9) of the Working Time Regulations 1998, except in relation to the additional 1.6 weeks' statutory leave provided under reg.13A, which can be carried forward into the next holiday year if a relevant agreement has been entered into under reg.13A(7).

There is nothing to prohibit employers allowing contractual leave in excess of the statutory minimum to be carried forward, but in light of Stringer, employers may wish to limit this to avoid excess holiday entitlement building up. A review of employers' holiday policies is therefore in order. In particular, employers should make sure that, as a general rule, employees are required to take holiday in the leave year in which it falls, with limited rights to carry forward contractual holiday. Either there should be no carry-over right or it could be limited to up to, say, five days.

Employers should consider any individual case carefully to decide whether or not allowing the carry-over of more holiday than the policy allows may be a reasonable adjustment to consider for the purposes of the Disability Discrimination Act 1995.

Permanent health insurance

Where they are adopting the approach of encouraging employees on long-term sickness absence to take holiday, employers that provide permanent health insurance will need to be sure that this approach is agreed to by the insurers and is compatible with the insurance policy. Employers should avoid taking any steps that could jeopardise an employee's insurance cover and result in a significant liability for the employer, which could be ordered to compensate the employee for the loss of permanent health insurance benefits.

Typically, permanent health insurance schemes provide for the insurer to pay a percentage of the employee's full salary as a benefit under the scheme. However, where an employee is encouraged to and does take annual leave while on sickness absence, arguably the employee is entitled to be paid his or her normal holiday pay, which is likely to be full salary. Employers should review the terms of their permanent health insurance policies to establish who will be responsible for any top-up payments when annual leave is taken and whether or not taking annual leave could jeopardise employees' continued eligibility for payments under the scheme.

TUPE

Where there is a transfer of a business or outsourcing to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) apply, reg.4 will operate to transfer all employees' rights to the company taking over the business or providing the service after the transfer. Therefore, employers need to be extra vigilant to review the position of transferring employees who are on long-term sickness absence or who have poor sickness records. Transferee employers should determine the scale of the liability they may be inheriting to pay for accrued holiday in the light of Stringer. If those liabilities are significant a discount from the purchase price may be in order.

Next week's article will be a checklist for employers on managing the implications of the Stringer decision and will be published on 17 August.

Julian Hemming (julian.hemming@osborneclarke.com) is Employment Law Partner at Osborne Clarke.

Further information on Osborne Clarke can be accessed at www.osborneclarke.com.