What does an employer do when an employee claims holiday pay even though they have been on sick leave for a long period? For example, if a member of staff is off work sick for a year, are they still entitled to paid holiday? Similarly, what happens in situations where staff have used up all their holiday leave entitlement but still claim holiday pay?
The statutory right to a minimum of four weeks’ paid holiday was introduced under the Working Time Regulations 1998, but the courts have encountered problems in how to administer the entitlement. A recent Court of Appeal case dealt with such issues, but where does this leave employers?
The Employment Appeal Tribunal (EAT) had held in Kigass Aero Components Limited v Brown ( IRLR 312) that the right to accrue paid holiday was not dependent on having attended work or performed any services for the employer during the leave year. From the employer’s point of view this was an unwelcome development, as it would allow for workers to give notice that it was their intention to take paid leave at any time, even when there had been a prolonged absence of months or even years and entitlement to sick pay had been exhausted.
From the employee’s side there were also potential problems with this interpretation. The regulations provide that employers and employees can give notice as to when the leave is to be taken. Following the ruling that paid leave could be taken at any time, including during a period of sick leave, the door was open for an unscrupulous employer to give notice to the employee that they were to take a week’s leave while too sick to work.
Against this rather unsatisfactory background, the Court of Appeal for the first time reviewed the rights to paid leave under the regulations in the important case of Commissioners of Inland Revenue v Ainsworth and others ( IRLR 465).
The case itself concerned workers claiming holiday pay following periods of long-term sickness absence and the exhaustion of sick pay. Disputes had arisen relating to an employee’s request to take paid leave following the expiry of their sick pay entitlement, and also the issue of whether an employer was liable to pay accrued holiday pay to an employee whose contract was terminated following a long-term absence.
The legal issues
There were two legal issues on which the Court of Appeal had to reach conclusions. First, were the previous rulings of the EAT, that holiday continues to accrue during leave, correct? Second, whether in any claim to enforce rights to paid leave the employees can assert there to have been an unlawful deduction from wages, rather than use the regulations themselves?
The enforcement issue was of more than just academic interest as depending upon the appropriate means used, there could be a considerable difference in the level of the award. The regulations provide that there is no carry over of holiday entitlement and any claim has to be made within three months of the date when payment for the leave should have been made. The effect is that the maximum compensation that an employer may be required to pay is four weeks’ pay, as the employee’s entitlement to leave is set at four weeks per year.
However, the unlawful deductions from wage provisions contained in the Employment Rights Act 1996 provide that a claim can be made in respect of a series of deductions. Put that together with the right to holiday in the regulations, and there is the possibility for compensation to include four weeks holiday pay for every year since the introduction of the regulations in October 1998.
In a number of situations, this may mean that the employer is at risk of a considerable claim. It may be the case that the individual has been treated as being self employed and outside the scope of the regulations. However, the line between who is a worker and who is genuinely self-employed can be difficult to identify, and if an individual successfully brought a claim then the compensation could potentially be backdated to when the regulations were brought into force.
There would also be considerable risk where a dispute arose over the way in which holiday has been organised if this did not meet with the regulations. The situation where a worker was paid an extra sum in addition to wages to meet the requirement to provide paid leave is one that has become increasingly common, especially where the worker was casual or had a limited number of hours on site.
However, the validity of these ‘additional’ payments was called into question and that issue has now been referred to the European Court for a decision. In the meantime, there is case authority in Scotland to the effect that payment made at a separate time to the holiday does not meet the requirement of the regulations to provide paid leave. Furthermore, the amount of the allowance cannot be offset against the amount due in respect of holiday pay. If this decision is approved, the employer could face the prospect of a claim being made for a series of deductions for the past six years, even though payment had already been made once. A very costly prospect.
Court of Appeal ruling
The Court of Appeal concluded that by finding a worker was entitled to paid leave when absent from work due to sickness, insufficient attention had been given to the key word ‘leave’. If a worker is already absent, how could ‘leave’ be taken? This would amount to leave from what? Taking into account that the regulations were intended to give the right to take time off from the pressures of work and not to provide a financial windfall, it held that workers already absent did not continue to accrue a right to statutory paid leave.
In relation to enforcement and the apparent conflict between liability for claims under the regulations, (restricted to the current year’s holiday entitlement), and the unlawful deductions from wage provisions that enabled a claim to stretch back over a number of years, it held that the regulations contained specific provisions for the enforcement of the rights that they introduced and that the regulations must therefore be used to enforce these rights. In conclusion, the employer’s liability for holiday pay is limited to compensation for the current year.
The Court of Appeal decided that the particular claimants did not accrue rights to paid leave under the regulations while on long-term sick leave. Also, when a worker’s contract of employment is terminated, there is no entitlement to be paid accrued leave for a period during which they have been on long-term sick leave.
This decision does pose some very important questions. For example, is it the case that other workers who are absent for long periods will not be entitled to accrue holidays under the regulations? Would an employee on maternity leave accrue paid holidays under the regulations? There may be the risk of a claim of sex discrimination. There is also the risk of a claim for disability discrimination by an employee on long-term sick leave who is denied accrued holiday entitlement.
The Court of Appeal judgment did not address how entitlement to paid leave will be affected by other types of long-term absence, neither did it consider discrimination claims of any type. It is important to remember that the case dealt solely with statutory holiday entitlement under the regulations. There was no reference to the contractual rights that apply between the employer and employee. In other words, the fact that the regulations provide that all workers are entitled to a minimum of four weeks’ holiday, does not necessarily mean that the worker cannot rely on the rights contained in the contract of employment.
In most cases, the contract of employment will specify a number of weeks holiday a worker can take, in accordance with the contractual rules. However, the Inland Revenue v Ainsworth case could still have an impact. The Court of Appeal ruling may be taken into consideration when assessing how those express terms are to be interpreted. It may be possible to resist a claim for contractual holidays on the grounds that there is an implied term that they will only accrue during a period that the employee is actively in work?
In relation to maternity leave, the Maternity and Parental Leave Regulations provide that all terms and conditions except those relating to pay will continue to accrue during ordinary maternity leave. This ensures that the employee has a right to continue to accrue contractual holiday.
However, during additional maternity leave, only certain specified contractual rights will accrue. Terms relating to holidays are not specified.
This is not the end of the story. The treatment of holiday pay under the regulations will now be considered by the House of Lords. In the meantime, it looks as if any current claims related to periods of sickness absence or a series of deductions will be put on hold.
Guy Guinan is employment partner at law firm Halliwells LLP