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Paying up for fun in the sun

01 Sep 09

Important changes have been made by the House of Lords regarding the rules on accrual of holiday pay. Changes that leave employers with an increased liability for such monies, and a number of questions unanswered, as Gareth Edwards explains.

By Gareth Edwards

While an employer and an employee can generally agree (in a Contract of Employment or holiday policy) on the number of days holiday an employee is entitled to, and when that holiday can be taken, there are minimum requirements set out in the Working Time Regulations 1998. Those regulations implement an EU Directive passed on the 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 now 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 pay was part of a number of Health and Safety-related measures. On this basis, if an employee is unable to work, they do not need a holiday from work and should not accrue holiday while off sick.

The European Court of Justice (ECJ) considered this issue earlier in the year and decided that, contrary to the views of most employers, an employee's entitlement to accrue annual leave should continue while 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 they have an opportunity to take the holiday, then that 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 carrying forward of holiday. Employers are now familiar with the requirement that employees should take their holiday entitlement during the holiday year. If they fail to do so, then they lose it. The House of Lords was therefore required to rule on the point.

In support of the European Court of Justice

The House of Lords issued its judgement earlier this month. It supports the ruling of the European Court. As a result, workers now continue to accrue their four weeks' paid annual leave even while 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. 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 Working Time 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 Working Time 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 for that amount of time.

What happens in light of the ruling?

The House of Lords case confirms that employers cannot refuse sick workers their paid annual leave. Nor can they reduce termination payments on account of sickness.

However, some questions 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 Working Time 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 long-term sick. They may now be entitled to payment of accrued holiday when they eventually leave. The financial repercussions should never be underestimated, not least because of the current economic climate.

Critical assessment of current policies

Employers should critically assess their existing practices, and review their sickness, holiday and maternity policies to ensure they now comply with the new position.

In addition, employers ought to consider the extent to which they manage the sickness absence of employees. The decision taken by the House of Lords is arguably another incentive for employers to proactively manage sickness absence with a view to reducing overall liabilities.