Working Time Regulations – House of Lords rules on holiday pay and sick pay issuesWednesday, June 17th, 2009
The contentious issues raised in the case Revenue & Customs v Stringer and Others were first raised in 2002 and it was only on 10 June 2009 that the Law Lords brought them to a conclusion. However, although the legal issues may be settled, the potentially costly implications for employer are far from resolved.
Coverage of the House of Lords decision requires a brief initial explanation of the statutory rules for making complaints for non-payment of holiday pay in the Employment Rights Act 1996 and the Working Time Regulations 1998.
Employment Rights Act 1996 (ERA)
- Section 13 protects workers from unauthorised deductions from wages, including a payment of wages that is less than that required contractually.
- Section 23 enables a worker to present a complaint to an employment tribunal that the employer has made an unauthorised deduction of wages if the complaint is made
- within three months of the date of the deduction, or
- if the complaint relates to a series of deductions, within three months of the date of the final deduction in the series.
- Section 27 defines “wages” as any sums payable to the worker in connection with his employment, including:
- any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise, and
- other payments made under specified legislation, including, for example, SSP, SMP, SAP and SPP.
Working Time Regulations 1998 (WTR)
- Regulation 13 provides workers with entitlement to 4 weeks’ annual leave in each leave year
- Regulation 13A provides workers with entitlement to 1.6 weeks’ additional annual leave in each leave year
- Regulation 14 requires payment in lieu of untaken annual leave to be made on termination of employment
- Regulation 16 requires payment for annual leave to be paid at the rate of a week’s pay for each week of leave
- Regulation 30 enables a worker to present a complaint to an employment tribunal that the employer has not permitted leave to be taken under Regulations 13 or 13A, or has failed to pay any amount due under Regulations 14 or 16, if the complaint is made within three months of the date of the breach of these Regulations.
The story so far
Two Employment Appeal Tribunal (EAT) decisions in 2002 began the story:
- Are employees entitled to paid holidays while on extended sickness absence? The ruling in Kigass Aero Components v Brown was that, under the WTR provisions:
- there is no pre-condition that a worker must be at work before taking holiday leave
- a worker absent from work on medical grounds may give notice to take paid holiday leave and, on completion of that leave, return to sick leave.
- Can a complaint for non-payment of statutory annual leave only be brought under the WTR provisions? The decision in List Design Group Ltd v Douglas and Others was that such complaints may be brought under the ERA or the WTR. Complaints may be heard in relation to a series of deduction failures under the ERA, an option not permitted under the WTR provisions.
In February 2004, the EAT, in the case Commissioners of Inland Revenue v Ainsworth and Others (the “others” included a Mrs. Stringer), considered appeals against the decisions of four employment tribunals, all of which revolved around the issue of whether employees are entitled to paid annual leave while on extended sickness absence. Mr. Ainsworth and the other complainants had all been employees of the Inland Revenue, as it was then known. The employment tribunals had all found in their favour, in line with the Kigass and List Design decisions. However, the EAT declined to review those EAT decisions and referred the cases instead to the Court of Appeal.
The Court of Appeal, in April 2005, reached the following conclusions on the issues before it:
- The right to annual leave cannot refer to leave from sickness absence. There is no obligation for an employer to treat a worker, who is on long-term sickness absence and has been unable to attend work throughout a full leave year, as entitled to paid holiday leave under the WTR provisions.
- If there is no entitlement to holiday pay during extended sickness leave, there can be no entitlement to payment in lieu of untaken annual leave when the employment is terminated.
- The inclusion of “holiday pay” in the ERA definition of “wages” brings contractual holiday pay into scope but not holiday provided “otherwise”, i.e. payments for annual leave under the WTR. The WTR is later legislation and has its own enforcement regime. Payment for annual leave was not added to the list of specified payments, such as SSP and SMP, with the result that the WTR’s annual leave provisions cannot be enforced using the deductions from wages provisions of the ERA. A complaint for non-payment of annual leave, whether during employment or after termination, must be made within three months of the date the payment was due. Unlike the ERA provisions, such a complaint cannot apply to failures to pay annual leave that are part of a series of payments that were due, but not paid, more than three months earlier.
These Court of Appeal decisions were subsequently appealed to the House of Lords but, in October 2006, the Lords referred the issues raised by the appeals to the European Court of Justice (ECJ). By that time, the case had been renamed Stringer and Others v HM Revenue and Customs. It was not until January 2009 that the ECJ published its decisions, namely that
- at the end of a leave year, the right to paid annual leave is not lost, even if
- a worker has been on sick leave for all or part of the leave year, and
- the incapacity that prevents the worker taking paid annual leave continues until the employment is terminated.
- on termination of employment, a worker who has been on sick leave for all or part of the leave year and who, for that reason, was unable to exercise the right to paid annual leave, is nevertheless entitled to payment in lieu of untaken paid annual leave.
The House of Lords decision
On 10 June 2009, the five Law Lords unanimously allowed the appeals. Although the judgement was given in the context of entitlement to paid annual leave during or at the end of long-term sickness absence, it made little reference to the ECJ decision, concentrating instead on the issue of whether complaints about paid annual leave could be made under the provisions of the ERA.
As already mentioned, the WTR provisions require complaints to be made within three months of an employer’s failure to provide annual leave or to pay for it. The ERA, while imposing an equivalent requirement, also allows complaints to be made within three months of the last of a series of deductions. Only if the ERA provisions can be applied to breaches of the WTR would employees be able to enforce the decision of the ECJ retrospectively, potentially over a number of years.
In reviewing the arguments of other courts and earlier decisions, the Law Lords concluded that:
- although payments in lieu of untaken annual leave are only due when the employment is terminated, they are part of the consideration for services already performed under the contract and are, therefore, “wages” that are made in connection with the employment, not payments in connection with the termination.
- annual leave under the WTR and annual leave under the employment contract are both “holiday pay” and no plausible distinction can be drawn between them.
- the word “otherwise” in the phrase “whether payable under his contract or otherwise” is not confined to statutes and regulations specified in regulation 27 of ERA but to any other legal obligation on the employer, including paid holiday leave under the WTR.
- the apparent failure to refer specifically to the WTR in the list of other statutes in regulation 27 of ERA is not significant – general reference is already made to “holiday pay” and payments such as SAP and SPP were specifically added later because SMP was already listed.
- the EC law principle of “equivalence” requires limitation periods for claims arising from EU law (e.g. the WTR) to be no less favourable that for claims arising under domestic law (e.g. the ERA).
As a result, all of the appeals under consideration by the Law Lords were allowed, the decision of the Court of Appeal was set aside, and the original EAT decision was restored.
Implications for employers
The problems that the House of Lords decision sets for employers arise initially from the erroneous decisions of the Court of Appeal in April 2005, namely that
- if an employee has been absent sick for a whole holiday leave year, there is no entitlement to paid annual leave under the WTR, and
- if there is, as a result, no entitlement to paid annual leave, there is also no entitlement to payment in lieu of untaken annual leave on termination of employment.
There is no question that the application of regulations 13, 13A and 14 of the WTR gives undesirable results where workers are on long-term sickness absence. We commented at the time that the Court of Appeal’s approach to the problems seemed to be that “there is a problem here so, in order to remove the problem, we must interpret the legislation in a different way”.
In overturning the EAT’s ruling in Kigass, the Court of Appeal argued that, because the Kigass decision gives undesirable results, workers cannot take “leave” from long-term sickness absence. Therefore, even though WTR regulation 13 says that a worker is entitled to four weeks’ annual leave each year and the only exception is for a worker who has not worked for a full holiday year, a further exception must be assumed if the worker is on long-term sick leave. In that situation, the Court of Appeal decided, the annual leave entitlement is nil.
However, the only reference to sick leave in the WTR and the source European Directive is in connection with the averaging of working hours in a reference period. There is no mention whatsoever of an exception for sickness absence, whether short-term or long-term, in the context of annual leave and pay. The Court of Appeal not only inferred such an exception in the regulations but also defined a rule that said that the exception only applies if a worker has been absent sick from work for a full holiday year. But, if there is a problem in giving holiday pay to a worker who has been absent for a whole year, is there not also a problem if the absence is for less than a year? If a line has to be drawn, why a year? Why not nine months, or six months? The Court of Appeal drew the line at a year.
The law does not always say what we would like it to say. However carefully a statute may be drafted to reflect all of the issues known at the time, new factors come along that can produce undesirable results. If that happens, the correct course is to amend the legislation, not to interpret the existing legislation in a way that was not originally intended.
Unfortunately, employers that applied the Court of Appeal’s rulings are now left with the potentially costly problem of paying holiday pay spanning the whole of an employee’s sickness absence.
- Employees on long-term sickness absence whose contracts were terminated within the past three months are entitled to make a claim under the ERA provisions for payment for unpaid annual leave, both during employment and on termination, that they have been denied.
- Such employees whose contracts were terminated more than three months ago are unable to make a claim under either the ERA or WTR provisions, unless they can convince the employment tribunal that it was “not reasonably practicable for the complaint to be presented” in time. If they cannot make a claim under the ERA or WTR provisions they may instead be able to make a civil claim in a county court, where the limitation period is six years.
Employers who have employees on long-term sickness absence need to look at each situation and decide what to do. Is it better to pay up outstanding holiday pay now or end the employment and see what happens? Many employers may well conclude that, as soon as statutory and contractual obligations during sickness absence end, they will set events in motion towards fair dismissal. The Acas advisory booklet Managing attendance and employee turnover provides balanced guidance on this situation.
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