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accrual and carry over of holiday pay during sickness absence

22 June 2009

Are we any clearer following House of Lords ruling?

Unfortunately not! The House of Lords decision in the case of HMRC v Stringer leaves employers still unclear on the important questions of whether holiday can be taken during periods of sickness absence and whether a worker can carry over accrued holiday from one year to the next. The case does, however, clarify that claimants will have three months from the last in a series of deductions to put in a claim under the Employment Rights Act 1996, as opposed to three months from the date of each deduction, as stipulated by the Working Time Regulations.

The European Court of Justice (ECJ), following a referral from the House of Lords in the Stringer case, ruled that employees on long term sick leave still accrue entitlement to holiday, which they can then take when they return to work, or be paid for on termination of employment - even if that is years later. The case returned to the House of Lords on 30 April 2009 and the judgment handed down on 10 June 2009 leaves employers with questions outstanding.

Does holiday accrue during periods of sickness absence?

Probably. HMRC conceded that holiday pay can accrue during periods when a worker is off sick. Previous judgments by the Employment Appeal Tribunal (EAT) have found that under the Working Time Regulations (as well as the Directive) annual leave does accrue during long term sick leave. The Court of Appeal ruled that holiday entitlement does not accrue during long-term sickness but the ECJ and House of Lords seemed to assume (without argument on the point) that holiday entitlement does accrue. However, this was not expressly stated in the House of Lords decision.

Can holiday be taken during periods of sickness absence?

This is still unclear. The ECJ ruled that there is nothing in European law precluding national laws which prohibits taking holiday while off sick; but nor is there anything in European law allowing it. So it seems it is all down to national laws. When the case returned to the House of Lords, it did not take the opportunity of deciding whether UK law does prevent employees from taking annual leave while off sick.

Can holiday entitlement carry over from one year to another?

This is also still unclear. The ECJ had concluded that, if a worker was prevented from taking their annual leave because they were off sick, then they must be allowed to take it later, either in the leave year when they return to work, or as a payment when their employment ends. The ECJs logic appears to be that if an employee cannot take their holiday during a holiday year because they have been off sick, then they have been deprived of a right guaranteed by EU law. They must therefore be allowed to take it later.

The answer may be that it depends on the particular contract of employment. If the contract permits annual leave during periods of sickness, then the logic behind the ECJs ruling that entitlement must be carried over from one year to the next does not apply.

Possible solutions

The state of uncertainty left in the wake of the Stringer case means employers are going to need to wait to see how the courts clarify these issues. In the meantime, the case may result in employers being less tolerant of employees on long-term sick leave. Employers may look to dismiss at an earlier stage than currently to avoid the risk of a build up of holiday during sickness absence and the expense of having to pay employees holiday whilst they are off sick or risk hefty payouts for years of accrued holiday. Dismissals would be fair, so long as the employer has reached a point where they cannot reasonably be expected to wait any longer for the employees return, and they have followed a fair procedure, including giving the employee a right to a hearing and an appeal. Employers also need to comply with their obligations under the Disability Discrimination Act 1995.

Employers will also need to consider who is responsible for payment of accrued holiday in circumstances where the employee has been off work but in receipt of PHI benefits. It is probable (but this may be a matter for negotiation with the PHI provider) that PHI payments will continue and the employer will have to top up to full salary. Employers should consider now how to mitigate claims for holiday back pay in these circumstances.

A further possible solution for employers may be to expressly state that employees are allowed to take their holiday entitlement during sickness absence. The employee cannot then argue that they were prevented from taking annual leave, nor would they have built up large amounts of accrued holiday entitlement when they return if they take the leave during periods of sickness absence. The logic behind the ECJs ruling on carry over of entitlement would not then apply. Employers wanting to take this approach will need to review their contracts and policies regarding absence and sick pay provision.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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