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Holiday pay can be accrued - House of Lords decision

The House of Lords has ruled that employees on long-term sick leave can accrue annual leave and other benefits, overturning the Court of Appeal and leaving employers with a potentially huge cost.

Their Lordships gave their final judgment in the long-running litigation in Stringer v HMRC ruling that workers should be entitled to statutory holiday pay while on sick leave can make a claim for unauthorised deduction from wages under the Employment Rights Act 1996.

The ruling which follows the European Court of Justice (ECJ) ruling held in January 2009, also means that staff do accrue paid holiday entitlement which can be carried over from one holiday year to the next if they have not been able to take their days off because of sickness absence and must be allowed to take it on their return. They can also receive payment in lieu if their employment ends.

The crucial impact is that a claimant will have three months from the last in a series of deductions to put in a claim under the ERA, as opposed to three months from the date of each deduction, as stipulated by the Working Time Regulations 1998. 

That the ECJ has now made it easier for employees to pursue employers who refused to pay sick workers annual leave if they wished to take it, will be claimed by unions and worker’s representatives as a victory for their rights. However, “the ruling is potentially a costly one for employers”, according to Susan Mayall specialist in the employment department at solicitors Pearson Hinchliffe Commercial Law. “They must assess their exposure to potential claims in respect of employees currently on long-term sick leave. Employers and insurers who provide income protection will wish to review the nature and extent of their cover in light of today’s decision”.

“The door may now be open to retrospective claims going back more than three months, as previously under the Working Time Regulations, and claims may go back even further if the underpayments form part of a series.” added Ms Mayall.

Background to the case (Source IDS)

The case, which began under the name Commissioners of Inland Revenue v Ainsworth and ors, concerned five employees of the Inland Revenue who brought various tribunal claims under the Working Time Regulations for holiday pay, even though they had been on long periods of sick leave and had exhausted their entitlement to contractual and statutory sick pay. One of them, A, complained that the Revenue had made an unlawful deduction from his wages in that it had failed to make a payment in lieu of any unused annual leave to which he was entitled, under Reg 14(2), upon the termination of his employment. Reg 30 provides that such a claim must be brought within three months of the initial breach of the Regulations. However, A decided to pursue the claim under the unlawful deductions provisions of the ERA, S.23(3) of which allows such claims to be brought within three months of the last in a series of deductions. The tribunal allowed his claim to proceed on this basis and went on to find that A was entitled to a payment in lieu of annual leave even though he was off sick at the time his employment terminated. This decision was approved on appeal by the EAT but then overturned by the Court of Appeal. It held that the Working Time Regulations were plainly intended to provide a single and exclusive regime for the enforcement of the right to annual leave, which the ERA should not be allowed to circumvent.

The House of Lords has now restored the decision of the EAT, holding unanimously that such a claim could be brought under the ERA, as the sum claimed by A fell within the definition of ‘wages’ under S.27(1) ERA. That definition – which refers to ‘a sum payable to a worker in connection with his employment’ and specifically includes ‘holiday pay… payable under his contract or otherwise’ – must be given a wide interpretation. Their Lordships were further fortified in this conclusion by the principle of equivalence, which requires national remedies for breaches of EC rights – in this case, rights derived from the EC Working Time Directive (No.2003/88) – to be no less favourable than those available in similar domestic proceedings, and to be capable of effective exercise in practice. The same principle applies to claims for payment in respect of periods of annual leave under Reg 16.

The main substantive issue in this case – namely, whether workers absent on sick leave still accrue annual leave – was referred to the European Court of Justice by the House of Lords. The ECJ answered questions on this and related issues in a judgment given in January this year (Brief 871). However, their Lordships did not need to consider the effect of the ECJ’s ruling, the parties being agreed that the EAT’s decision on this point should also be reinstated in light of the ECJ’s ruling. This means that the impact of some other aspects of the ECJ’s judgment – including its suggestion that annual leave accrued by a sick worker cannot be extinguished at the end of the leave year and must be carried over, something the Regulations do not currently provide for – remains unclear.

This case will be further reported in due course on www.phcommerciallaw.co.uk.

Pearson Hinchliffe Commercial Law can help you with employment law, especially providing advice on holiday pay and sick leave.

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