IMPORTANT changes have been made by the House of Lords to the rules on accrual of holiday pay. These leave employers with an increased liability for holiday pay and a number of questions unanswered.
Whilst an employer and an employee can generally agree in a contract of employment or holiday policy the number of days holiday an employee is entitled to and when holiday can be taken, there are minimum requirements set out in the Working Time Regulations 1998.
The Regulations implement an EU Directive passed on grounds of health and safety, and European case law is important when determining the amount of holiday an employee can take. A string of cases have been working their way through the courts for some time on the vexed question of whether an employee who is unable to work for a long period of time is able to claim accrued holiday as well as receiving sick pay.
Employers argue that the introduction of holiday was part of a number of health and safety measures and on this basis, if an employee is unable to work, he or she does not need a holiday from work and should not accrue holiday whilst off sick.
Contrary view
The European Court of Justice considered this issue earlier this year and decided that, contrary to the views of most employers, an employee’s entitlement to accrue annual leave should continue whilst an employee is on long-term sick leave.
The Court also held that accrued leave should be carried over into the next leave year if a sick employee has not taken it by the end of the holiday year. The Court went further and also said that if an employee’s employment is terminated before he or she has opportunity to take the holiday, then an employee should be paid in lieu of untaken statutory holiday.
The ECJ’s decision is contrary to the UK Regulations which do not permit the carry forward of holiday. Employers are now familiar with the requirement that employees should take their holiday entitlement during the holiday year and if they fail to do so, then they lose it. The House of Lords were therefore required to rule on the point.
The House of Lords issued its judgment last month, which supports the ruling of the European Court. As a result, workers now continue to accrue their four weeks’ paid annual leave, even whilst absent from work because of illness.
As a result, employers will not be permitted to prevent employees who are off sick from carrying over the statutory minimum amount of accrued annual leave.
Time to review contracts
Employers should review their contracts of employment and holiday policies to ensure that only statutory holiday accrues during periods of sick leave and that any additional contractual holiday entitlement ceases to accrue.
The House of Lords decision conflicts with the Regulations which stipulate that workers lose their annual leave entitlement if they do not take their holidays within a year. It is likely that the Regulations will be amended to comply with the judicial rulings.
Employers who deny their workers these rights may be exposed to an employment tribunal claim for unauthorised deduction from wages. This is more advantageous than bringing a claim under the Regulations as a complaint for unauthorised deductions can be issued within three months of the last in a series of underpayments. A claimant bringing an action under the Regulations only has three months from the date of each deduction.
Arguably, the decision is more wide-ranging as employees could bring a claim for unpaid holiday as a breach of contract claim.
Employees have six years from the date of breach to bring a claim and this may lead some employees or former employees to bring claims for unpaid holiday pay dating back six years.
What happens now?
The House of Lords case confirms that employers cannot refuse sick workers paid annual leave. Nor can they reduce termination payments on account of sickness.
Some questions, however, remain unanswered. The European Court ruled that a worker on sick leave who, at the end of a leave year, has been unable to take holiday must be allowed to carry it over (this is not currently permitted under the Regulations).
However, the House of Lords did not confirm whether workers in the UK will be able to carry forward statutory holidays accrued during an entire holiday year spent off sick to the next holiday year in which they return to work.
There are, therefore, additional costs of employees remaining on longterm sick and they may now be entitled to payment of accrued holiday when they eventually leave. The financial repercussions should not be underestimated, not least because of the current economic climate.
Employers should critically assess their existing practices, and review their sickness, holiday and maternity policies to ensure they now comply with the new position.
Employers should consider the extent to which they manage the sickness absence of employees and this decision is arguably another incentive for employers to proactively manage sickness absence with a view to reducing the overall liabilities.
