Employees taken ill during a period of scheduled annual leave should now be allowed to reschedule their holidays, according to a new ruling by the European Court of Justice (ECJ). So what impact will this have on current employer policies and will this make it easier for employees to abuse the law?
This year we have already seen two important decisions concerning holiday pay and sick leave which are likely to have significant future implications for all employers. In H.M Revenue & Customs v Stringer  UKHL 31 (Stringer), the House of Lords considered whether an employee accrued holiday entitlement whilst on sick leave and if so whether the claim based on an alleged failure to make a payment in lieu could be brought as a claim for unauthorised deduction from wages under the Employment Rights Act 1996 (ERA). If it could, this would enable employees to claim, not only for failure to pay at the time employment was terminated but also for deductions in previous years.
Under the ERA an employee has three months to make a claim for unauthorised deduction from wages. Where there is a series of events the time doesn’t start to run until the date of the last deduction and could go back many years. Under the Working Time Regulations 1998 (WTR), the employee would have three months from the date the payment for accrued but untaken holiday was due, so would only be able to claim for the most recent deduction.
In Stringer the employee’s employment was terminated four days into a new leave year. He was off sick on these four days. He calculated that he was entitled to Ã‚Â£16.14 – a payment in lieu of the leave accrued over this period and the respondent accepted this. However, they argued he was not entitled to claim for the holiday accrued in the previous leave years under the ERA. The issue was thus one of interpretation – the ambit of “wages” under the ERA.
The House of Lords held that even though the payment was only received on termination of employment, it was in consideration of services previously performed which fell within the definition of the “wages”. As a result, the ERA system of time limits applied and the claimant could recover for unpaid holiday entitlement accrued in previous leave years.
The Working Time Regulations 1998 implemented a 1993 European Directive (93/104/EC). This Directive was replaced in 2003 by Directive 2003/88/EC which was considered recently by the European Court of Justice in the Spanish case of Pereda v Madrid Movilidad SA (C-277/08, 2009) (Pereda). In Pereda, the employee, a driver for a vehicle removal company, was allocated annual leave from 16 July to 14 August 2007 as part of his employer’s collective agreement on annual leave. However, he had an accident at work on 3 July 2007 and, as a result, was on sick leave until 13 August 2007. Thus, for most of his holiday entitlement, he was off sick. The employee requested a new period of paid annual leave from 15 November to 15 December 2007. His employer refused. He brought proceedings in Spain and the Spanish court sought a preliminary ruling from the ECJ on interpretation of the 2003 Directive.
Article 7 of the 2003 Directive provides that employees are entitled to at least four weeks paid annual leave. The question for the ECJ was whether this meant that when the period of planned annual leave coincides with a period of temporary disability following an accident at work, the employee is entitled to take his leave on dates different from those originally allocated. The ECJ’s answer was that an employee was entitled.
The ECJ took the view that the right to paid annual leave was not extinguished at the end of a period where the employee was on sick leave for the whole or part of the leave year, and has not actually had the opportunity to exercise that right. The purposes of annual holiday was to ensure that the employee was able to rest and enjoy themselves and this would not be achieved during sick leave. Thus, an employee on sick leave during a period of previously scheduled annual leave has the right to take annual leave at a later time when he is not on sick leave, even if this involves carrying over that leave into a new leave period.
The future for employers
So what are the implications for employers? In relation to Stringer, employers are likely to face claims by employees on long term sick for any accrued but untaken holiday and this can be claimed for as long as that individual has been unable to take holiday due to ill health. It highlights the importance of good practise when dealing with employees on long term sickness absence. Employees should be monitored and reviewed by medical practitioners to speed up the process by which they are either returned to work, or alternatively, if there is no reasonable prospect of this in the foreseeable future, for their employment to be terminated (whilst at the same time applying the correct procedures for doing so and not in breach of the Disability Discrimination Act). Employers who simply leave an employee ‘on the books’ when their entitlement to sick pay has expired without ever formally terminating their employment are at risk of a significant claim for accrued holiday pay which could go back many years.
Understandably there will be considerable concern that the decision in Pereda will give rise to abuse by employees wishing to secure additional time off at their employer’s expense.
The ruling in Pereda was in response to a referral from the Spanish jurisdiction to the ECJ and therefore will only have direct effects for public sector employees who are entitled to enforce EU law against an emanation of the state. Having said that, the Employment Tribunal cannot interpret UK law in any way that is inconsistent with EU Law so it is likely that any employer who fails to comply will face a claim. (Stringer is a House of Lords decision and so can be relied on by all employees).
The first step is for employers to review their company policy on sick leave and once reviewed, that any changes are communicated to employees. The approach taken to date has varied from employer to employer, some taking the pragmatic approach of allowing employees to take additional leave if they have been off sick, whilst others have made a clear policy decision not to allow further time off for those who fall ill on holiday. Whilst the policy should explain that holiday entitlement accrues during periods of ill health and that any illness during a pre-arranged holiday can be taken at a later date, it should also be made clear that anyone abusing this will be subjected to disciplinary proceedings.
Policies regarding ‘carrying over’ holiday into a subsequent holiday year will also need reviewing. The WTRs currently do not provide for holiday to be carried over but the judgment in Pereda specifically allows this. The correct approach is likely to be a policy that allows holiday to be carried over into the next holiday year only where the employee has been unable to take that holiday due to ill health.
To address concerns regarding the costs of additional leave, employers may also wish to consider their policy on sick pay. If an employee is off sick whilst on holiday, they are not obliged to take it as sick leave but can elect to do so. Those employers allowing a generous sick pay are more likely to encourage employees to take sickness leave during holidays as they will be paid for it, as well as retaining holiday entitlement. If employees are not entitled to company sick pay, there is no financial incentive where the illness is not legitimate. Lack of company sick pay may also assist in getting employees back to work who may otherwise have long terms sickness absence – and who are therefore accruing holiday under Stringer.
This must of course be balanced with the advantages in recruitment, staff retention and employee morale which results from generous sick pay entitlement. The best approach is generally one that allows the employer a discretion to provide sick pay. However, if contracts allow sick pay, or custom and practise dictates that it is paid, they will be difficult to change.
Are employers protected against abuse of the law?
Proof of illness will also be an important factor in preventing abuse of the policy. Usually employees will be required to contact their employer on the first day of any illness and on each subsequent day. It should be made clear to employees that this applies to any sick leave that the employee takes whilst on holiday.
Employees will usually be entitled to self-certificate for the first seven days of illness and it is difficult to see how employers can secure medical evidence for short term absence, such as are likely to be seen during holiday periods. Employers should reserve the right to have any employees medically examined which may deter some from flouting this new legislation, and make sure return to work interviews are held.
What can you do if you suspect that an employee is abusing the law? The first step is to consider the employees holiday and sickness records. These should be kept in a format that allows cross checking. Has the employee previously taken sickness absence whilst on holiday? Consider whether they have gained financially as a result through company sick pay. Was any evidence of ill health provided and were any medical practitioners consulted? Employees who have travel insurance may have made a claim under this. Ensure return to work interviews are carried out to cover all of these elements.
If there is evidence that the employee has been ill on holiday before, and they are being paid for it, consider carefully whether to commence disciplinary proceedings, bearing in mind requirements of the Disability Discrimination Act. An informal warning at an early stage may be all that is required to prevent a recurrence.
Vanessa Latham is an Employment Partner at Berrymans Lace Mawer LLP solicitors.