In this paper we consider some of the options for employers in dealing with holidays and sickness absence as a result of the decisions in “Stringer” and “Pereda”.

H M Revenue & Customs V. Stringer & Others [2009] UKHL 31 - Facts

The Employment Tribunals and the Employment Appeals Tribunal (EAT) allowed the claims following earlier rulings in Kigass Aero Components Ltd v Brown UKEAT/481/00 and List Design v Douglas and others EAT0966/00.

The Court of Appeal upheld the Revenue's appeal concluding that both Kigass and List Design had been wrongly decided. The Court of Appeal’s reasoned that, as there is no obligation to work during sick leave, a worker has no right to paid annual leave under the Working Time Regulations (WTR) for that year. It followed that, if a worker has no right to paid annual leave, they have no right to a payment in lieu on termination of employment.

The workers appealed to the House of Lords which submitted a reference to the European Court of Justice (ECJ) seeking a preliminary ruling on the interpretation of Article 7 of the Working Time Directive (WTD).

ECJ Decision

The ECJ held that the right to paid annual leave is a particularly important principle of Community social law from which there can be no derogation. Whilst Member States may set conditions for the exercise of the right to paid annual leave, the existence of the right itself may not be made subject to preconditions.

It held that it is for national courts to determine whether workers should be permitted to take annual leave during sick leave. However, if a worker was prevented from taking annual leave, national law must enable the worker to take their holiday at a later date, even after the end of the leave year. Furthermore, accrued annual leave must be paid in lieu on termination, regardless whether the employee had been on sick leave for the whole or part of the leave year. The case returned to the House of Lords for judgment.

House of Lords

Following ECJ judgement, the Revenue conceded (and the House of Lords implicitly agreed), that employees could take statutory annual leave during sick leave since the WTR prohibits annual leave being carried over. Accordingly, the Court of Appeal's decision was overturned and the earlier EAT decisions reinstated. The only remaining issue before the House of Lords was whether non-payment of holiday pay and non-payment in lieu of untaken holiday amounts to deductions from wages under the Employment Rights Act 1996 (ERA).

The House of Lords unanimously held that a claim for unpaid holiday pay under Regulations or a payment of holiday pay on termination of employment can be pursued as an unauthorised deduction claim under the ERA as well as under the WTR.

This means that workers can take advantage of the more generous time limits which apply to unlawful deduction claims under the ERA. A claim for unpaid holiday pay under the WTR must be brought within three months of when the payment was due. However a claim for unlawful deduction from wages under the ERA can be brought within three months of the last in a series of deductions. This allows a claim to go back more than three months if the underpayments form part of a series.

Pereda vs Madrid Movilidad SA C2774/08 - Facts

Pereda involved a collective agreement which operated so that annual leave rotas were agreed in advance between the Works Council and the Employer. Mr Pereda was scheduled to take annual leave from 16 July to 14 August. However, he was on sick leave until 13 August. Accordingly, he asked for an alternative period of annual leave. His employer refused. Mr Pereda challenged that decision before the Labour Court in Madrid. The court made a preliminary reference to the ECJ.

ECJ Decision

The ECJ held that the entitlement to annual leave under the Directive is a particularly important principle of Community social law from which there can be no derogation.

The ECJ noted that the purpose of annual leave is to enable the worker to enjoy a period of relaxation and leisure. The purpose of sick leave on the other hand is to allow the worker to recover from being ill. It followed that a worker who is on sick leave during a period of previously scheduled annual leave has the right, on his request, and in order that he may actually use his annual leave, to take the leave at another time that does not actually coincide with a period of sick leave.

Therefore, while a worker may take annual leave during sick leave, if he does not wish to do so, it must be granted at a different time.

Options for Employers - Stringer

The parties before the House of Lords agreed that the WTR must be interpreted as allowing workers on long-term sick leave to take their paid holiday entitlement during sick leave. Therefore, employers must now permit employees who are on long term sick leave to take and be paid for annual leave during sick leave.

One question that arises is whether the worker must request the leave. In Kigass the EAT held that any worker who gives proper notice of leave to be taken under the WTR is entitled to be paid regardless of whether he is already absent from work on other grounds such as sickness. This would seem to require notice. However, in List Design, the EAT held that a worker must be paid in respect of a period of annual leave to which they are entitled. This would not seem to require notice. The decision in List Design is the stronger decision as the decision in Kigass was obiter. Furthermore, List Design has been followed in a subsequent EAT decision, namely “Canada Life v Gray and Farrar UKEAT/0657/03/SM”. Therefore, in our view employees are not required to specifically request taking the leave.

It is also worth bearing in mind that if the employee’s employment is terminated after period of sickness lasting a year or more in which holiday pay has not been provided, the employee could bring a claim of unlawful deduction from wages, linking the last non-payment of holiday pay as the last in a series of deductions.  Accordingly, it may be wise for an employer to encourage the employees whom they suspect will need to take long term sick leave to designate a period of the leave year as statutory annual leave. However, in light of the ECJ’s ruling in Pereda (considered further below) it will not be possible for employers to insist on employees taking their annual leave during sick leave.

This decision places a greater need for pro-active management of sick leave. Employers should take steps to ensure employees do not languish on sick leave from one year to the next and build up significant amounts of leave. For example, consider using a diary system to ensure that the capability procedure is implemented sooner rather than later to get employees back to work. Where there is no realistic possibility of this (and this has been confirmed by medical opinion) consider terminating the employment. However, if dismissing an employee on long term sick leave an employer will need to act reasonably to avoid a finding of unfair dismissal. Also, if the employee has the benefit of Permanent Health Insurance (PHI) cover and eligibility is dependent on them remaining employed, an employer will face a potentially very large bill for breach of contract if they dismiss and thereby deprive the employee of PHI benefits.

Stringer applies to the statutory minimum holiday entitlement of 28 days. If a worker benefits from additional contractual holiday in excess of their statutory entitlement, the excess holiday will be governed by their contract of employment. Thus, a provision could be included so that only statutory annual leave accrues during sick leave. Such a provision would have to be very carefully worded as it could be indirectly discriminatory. For example, on grounds of disability, or on grounds of sex or maternity leave in the case a woman taking sickness absence due to a pregnancy related illness.

Stringer has potentially very significant cost implications for employers. In the current economic climate, this is a cost they can ill afford. Accordingly, if an employer has a generous sick pay scheme, they should consider making changes to it to try and set-off some of the costs of the decision. However, if the terms of the scheme are contractual, be aware that the employees could claim breach of contract/resign and claim constructive dismissal/unlawful deduction from wages unless changes are agreed.

Options for Employers - Pereda

Public sector workers can claim benefit of Pereda by virtue of the doctrine of direct effect. Workers in the private sector have no such equivalent right. Private sector employers may, pending legislative change, argue that the WTR do not oblige them to give effect to the Pereda ruling. However, employers wishing to avoid the risk that Tribunals will be inventive in their interpretation of the WTR and avoid the cost of proceedings, should amend their policies to allow annual leave to be taken at another time where the employee is ill during a period of annual leave.

The ECJ did not specify how sickness should be verified and it is likely that employers will be concerned about possible abuse. However, there is no reason why the strategies that employers usually adopt to prevent abuse (such as the obligation to report sickness to the employee's manager on the first day or to produce medical evidence) should not apply if sickness occurs during annual leave. Employers should amend their procedures so as to specify what evidence of sickness will be required.

Employers may also consider whether to limit contractual sick pay where the employee falls ill during annual leave; for example, by withholding contractual sick pay unless medical evidence is produced. This would be quite a draconian measure, possibly implying a lack of trust, and will require changes to the employer's sickness policy, if not also to contracts of employment.

Employers who currently provide in their contracts of employment (or in collective agreements) that employees must take annual leave during shut down periods, should be particularly cautious. If employees are ill during such periods it will be possible for them to insist on postponing their leave to a later date, or even to a subsequent leave year if it will not be possible for them to take the leave before the current leave year ends.

Conclusion

In light of recent developments we recommend that employers review their current contracts and policies on annual leave and sick leave as outlined above. As this is a new and developing area of employment law, employers should seek legal advice on specific issues that arise in the work place.

For further information on any of the issues raised in this article, please contact Ciara on 028 9055 3300 or e-mail, ciara.dooris@tughans.com