Stringer holiday pay decision leaves us with lots of loose ends

Published: 18th June 2009

The House of Lords have reached their decision in the case of Stringer, which is the long running holiday pay saga, which has been to the European Court and back. We had hoped that the House of Lords' decision would give us answers to the difficult issues which have arisen about the accrual and payment of annual leave during sick leave and whether it is carried over to subsequent years in long term ill health cases.Unfortunately, almost all of the key questions about how this all works in practice remain outstanding, because of the limited issues the Lords were ultimately asked to decide.

The key point the Lords have decided is that someone can bring a claim for holiday pay as an unlawful deduction from wages claim and within 3 months of the last of a series of such deductions. This effectively means employees can argue for payment of previous years holiday pay and, in long term ill health cases, the time limit for a claim is likely to be 3 months from the termination of employment (not 3 months from each refused request for paid leave where requests have been made).

This is just about all the Lords actually decided and it is our view that many employers will not wish to change policies and procedures on annual leave accrual and payment during sick leave, until we have all seen the outcome of the appeal decisions in other cases (which will inevitably follow). Changing policies immediately may be premature. However, we appreciate that the ongoing uncertainty is difficult for employers who continue to face many tricky questions, requests for paid leave, and decisions on paying accrued leave on termination. A summary of our view of the current position is as follows:

1. It is clear that employees on sick leave do continue to accrue annual leave whilst they are off sick, even if it is long term sickness absence with nil pay.

2. Employers would be well advised to permit employees to take paid annual leave during sickness absence upon request (although you will need to consider how such an application should be made). Employers may, or may not, wish to proactively take steps to inform employees of this, although informing them is the "safest" option.

3. If employers do not allow employees to take paid annual leave whilst on sick leave, the employee may well have a claim as a result and is highly likely to retain all of their accrued annual leave into subsequent leave years (irrespective of internal policies) as the employee will have been "unable" to take such annual leave whilst off sick. This means that employees may build up a large bank of entitlement to accrued annual leave which they will either be able to take on their return to work or be paid for on termination of employment.

4. Where employees are unable, or do not have the opportunity, to take annual leave in any given leave year due to the severity of their illness or because they are otherwise "unable" to make a request to take holiday, they will be entitled to carry it over to a subsequent leave year. The Lords have not decided what is meant by "unable".

5. A robust approach for employers who allow annual leave to be taken during periods of sickness absence, is to argue that employees do not carry over to subsequent years the right to previous years annual leave even if they are absent for the whole of a leave year on ill health grounds. This is based on the argument that the individual is "able" to request periods of paid annual leave even whilst off sick and take it during the leave year to which it applies. If correct, this does avoid the build up of annual leave but we will need to see a test case to see if such an approach is correct. A degree of discretion would need to be applied in circumstances such as those referred to in paragraph 4 (severe illness makes it impossible for the employee to actually take/request holidays despite having the "right" to do so).

6. The most cautious approach for an employer is to allow all employees to carry over any outstanding annual leave at the end of each leave year where that individual has been off sick and thus unable to take it. This may result in a large build up of annual leave which will be taken later on return or paid on termination. We would not recommend formally changing policies to state this yet (pending future cases) even if you decide to take a cautious approach as an interim measure.

7. We will have to wait for future cases to see whether all of these points are limited to "only" the European minimum annual leave (4 weeks), the minimum under the Working Time Regulations (now 5.6 weeks), or whether it extends to contractual entitlement where it is greater. It is likely that the Courts/Tribunals will prefer a consistent approach, but arguably what applies is limited to the European leave amount. The contractual argument may depend upon the precise wording of contracts and policies. Employers may wish to consider trying to distinguish between statutory leave entitlement and contractual leave entitlement on accrual during sick leave and carry over, although this may be something better left until we have greater legal certainty. As such a split level approach would require reconciliation of leave taken/denied prior to the eventual outcome of this saga, we would suggest this is likely to be best avoided.

8. If you have a PHI Scheme where those being paid remain employed, this is a serious headache as the same issues and potential for accrued leave applies. The insurers are unlikely to cover additional payments for leave and the potential leave accrued may be significant if PHI is claimed for a number of years. If you are considering introducing a PHI scheme this is a strong argument not to do so.

9. There is an argument that the UK Regulations are simply inconsistent with European law, which remains undecided. If correct, this could mean that private sector employers do not need to allow carry over of accrued leave to subsequent years whatever the European cases say. UK law would ultimately need to be amended but that may not be retrospective. However, for public sector bodies, this argument is not available as European law has "direct effect".

We appreciate that this does leave everyone with a headache in the practical application of annual leave and sickness leave. It is now clear that keeping employees on the books whilst on unpaid sick leave carries a high risk of significant annual leave accrual, meaning that effective management of those absent on long term ill health grounds is more important than ever. You also may wish to look at the actual costs to you of the different approaches to holiday accrual and take a view on whether it is better for you to incur additional leave costs now by proactively pushing paid leave during unpaid sick leave, or awaiting the potential cost of amassing leave. Unfortunately, the legal issues on this complex subject are set to run and run, and we await future key decisions on many of the important points. If you would like to discuss any issues this raises for your organisation, please do take advice from your usual contact in the Mace & Jones Employment and HR team in Liverpool: 0151 236 8989 or Manchester: 0161 214 0500.