HOLIDAY PAY ACCRUAL DURING SICK LEAVE

Long Term Sickness

The House of Lords has decided that workers who are denied holiday pay having taken sick leave, can claim for unauthorised deduction from wages. This decision arises from the long-running case of Stringer v HMRC <Stringer v HMRC> and has significant implications for all Employers with long term sickness cases.

Their Lordships held that a claim for unpaid holiday can be pursued as unauthorised deduction claims as well as under the Working Time Regulations. The important practical effect is that a worker can take advantage of the more generous time limits which apply to unlawful deduction claims. A claim for unlawful deduction from wages can be brought within three months of the last in a series of deductions, so allowing a claim to go back more than three months if the underpayments form part of a series. The House of Lords ruled that workers who are denied holiday pay while on sick leave can claim to an employment tribunal for unauthorised deduction from wages under the Employment Rights Act 1996. Workers should now also be able to get outstanding holiday pay via a breach of contract claim in a county court - the time limit for which is six years running from the date of the breach. The recent decision effectively overrides the UK Working Time Regulations which had adopted a “use it or lose it” stance on annual leave.

The Court of Appeal had originally held that employees on sick leave did not accrue annual leave during the time they were not working.

The ECJ decided that a member state (i) could allow a worker off sick to take annual leave; or (ii) could prevent a worker taking leave while off sick but - and this is the critical point - only if the worker has the right to carry over annual leave to subsequent leave years if he or she was unable to take leave because of illness. It also held that compensation payments on termination should not be discounted on account of sickness.

The ECJ left it to domestic law to determine which applies: taking the leave whilst sick, or carrying it over, or both (and if so, who decides). Unfortunately the Lords have not sought to resolve that issue and the point remains unclear.

Employer's checklist

Employers should start to prepare themselves for the changes in this area. They may wish to consider the following issues:

• What steps can the Organisation take to ensure that employees do not ‘languish' on sick leave from one year to the next, and build up significant amounts of leave which at some stage may have to be paid.

• How will you deal with employees who have been on sick leave for a significant period of time? For example, consider implementing a diary system so that active steps are taken sooner rather than later to get them back to work, or where this is clearly not going to be possible, to terminate their employment following a fair dismissal process. Some employers have chosen to leave their long term sick people on the books for years on the basis that doing so cost nothing. Termination will become a more attractive option.

• Review current holiday terms and policies. If reference is made to untaken holiday being lost at the end of the leave year, this may be amended to leave out those on sick leave.

• The UK's minimum paid holiday entitlement is 28 days (for a full-time worker), and some employers have even more generous contractual holiday benefits. The Court's decisions only apply in respect of the statutory minimum annual leave entitlement in the Working Time Directive. You should be able to restrict any holiday which accrues during sick leave to a maximum of four weeks holiday, plus public holidays. Changes to terms and policies may be required to make this clear.

• You need to decide what to do about public holidays. You need to decide whether to pay as they arise or to treat them like holiday and let them take them when they return or pay for them when they leave.

• You should consider whether as a matter of policy you will prevent workers from taking and be paid for annual leave while on sick leave. Doing so may act as an incentive to return to work - if they have exhausted sick pay and cannot receive holiday pay until they return to work.

• If you operate an insured PHI scheme, talk to your insurer and check your cover. It is unlikely that paid holiday will be covered. Think about the practicalities of an employee who is receiving PHI taking annual leave at the same time, and how you will avoid the employee receiving a ‘windfall'. Will you be able to just ‘top-up' the PHI benefit to a level that equates to their normal remuneration? Again, consider whether changes to the scheme rules and/or terms and conditions will be necessary.

A few words of caution:

• Fundamentally, do not ignore people who are off ill. A long term sick case commences after 4 weeks of absence so contact your HR Consultant at that point to talk through the case.

• Do not forget that employees on long-term sick leave are likely to be protected by the Disability Discrimination Act 1995, which means they must not be treated less favourably because of their disability (without justification), and reasonable adjustments will have to be made for them.

• In dismissing an employee on long-term sick leave you will have to act reasonably to avoid a finding of unfair dismissal. This usually includes demonstrating that you have exhausted all options concerning their future employment.

• Where an employee's eligibility for PHI benefit is dependant, under the terms of the scheme, on them remaining employed, the employer will face a potentially very large bill for breach of contract if they dismiss the employee, thereby depriving them of PHI benefits. The only exception to this is where employees themselves have committed a fundamental breach of contract.

• Changes to contractual terms and conditions which employees regard as detrimental could be problematic, because you cannot impose such changes unilaterally; the employees must agree. If you force through significant changes, the employee could claim breach of contract and/or resign, and claim constructive dismissal.

Being sick whilst on Holiday

We now have an even more recent case on the related but dissimilar issue of what happens if someone's holiday coincides with a period of sickness.

The European Court of Justice (ECJ) has decided that if a worker is sick during a period of pre-planned annual leave, that worker must be allowed to take that holiday another time. If it is not possible to retake the leave during the current holiday year, the lost leave can be carried forward to the next one.

Mr Pereda had an accident at work and was unfit for work before his scheduled holiday and was only fit to return two days before his holiday was due to end. He asked his employer if he could take his annual leave later in the same year on grounds that he had been on sick leave for his original holiday and they refused.

The ECJ held that Mr Pereda should be allowed to reschedule his annual leave if he wanted to, so employers cannot require workers to take paid annual leave during a period of sickness absence. The ECJ clarified that sick leave is to allow workers to recover from illness, whilst annual leave is strictly designated to allow a worker to rest and enjoy a period of leisure. So what this means for employers is that if a worker decides not to take annual leave during a period of illness, he should be granted a replacement holiday period.

On its facts it is difficult to argue that Mr Pereda was hard done by and many British employers would have either allowed it according to their rules or applied some sensible discretion. Sadly, this case also potentially means that employees who fall sick whilst on a period of annual leave could 'claim back' their holiday entitlement This is not only a departure from most employers' current practice, it is clearly open to abuse by employees.

It is important to note that in the private sector, this judgment has no immediate application but this will not prevent employees and ill-informed employers from believing that it is now 'the law'. It is to be hoped that when the Working Time Regulations are revised in the UK that it is well drafted to prevent uncertainty, abuse and cost. The extent of abuse however is likely to correspond to an employee's entitlement to paid sick leave. For example, an employee entitled to statutory sick pay is less likely to raise the issue than an employee with generous contractual terms.

Another checklist

As this is a complex area of law and it is currently in flux, employers should set out clear policies for their workers regarding holidays and sickness in order to manage their expectations

• We would advise employers who have previously prevented workers from rescheduling holiday when they become ill during their leave to review their policies in light of the ruling.

• Employers should clarify their absence management policies so that employees cannot easily abuse the system. This could involve making employees phone their line manager daily if they are sick while on holiday, to confirm they are still sick and not fit for work’. It might also involve making it clear that holiday can only be cancelled after providing a medical certificate rather than a self certificate.

Key points

• Deal with employees on long term sickness

• UK employees who sickness coincides with their holiday may be able reallocate holidays they were unable to take due to illness.

• This probably applies to employees who become sick before and during holidays.

• A well drafted and properly applied absence policy can make the monitoring of levels of absence, and discouraging excessive or otherwise casual absences at all times, quite straight forward.

• Employers should proactively make sure that employees take their statutory holiday entitlement of 5.6 weeks so permitting holiday to be carried over to a new holiday year should only be agreed in certain circumstances such as sickness..

• If you have a generous sick pay scheme, consider whether you can make changes to it to try and off-set some of the cost implications of these rulings Employers might make sick pay less generous (if offered) or more discretionary, as most people will prefer holiday pay to SSP, half pay or pay after three days absence.

• Employers should note, however, that changes in their rules relating to holidays and sickness might only draw the attention of employees to rights that would otherwise have been overlooked

This is a difficult area, not least because the law still needs clarifying. You should talk to your HR Consultant about any employee who has been or will be off work for over a month and about any employee who tries to take advantage of the Pereda ruling.