Stuart Neilson: Employers suffer blow over Court's judgment on pay

Published on 01/02/2009 19:08

THE long-running question of whether workers absent due to ill health are entitled to take holidays and/or be compensated in lieu of holidays not taken was decided in the European Court recently.

In a controversial judgment, which appears to be driven purely by policy rather than any desire to offer genuine protection to workers, the European Court of Justice ruled that workers do not lose their right to holiday pay while off sick.

The Working Time Regulations 1998 (the Regulations) provide for a statutory minimum period of annual leave – presently set at 4.8 weeks, rising in April to 5.6 weeks.

This issue has been running through the UK courts for a number of years. In 2005, the Court of Appeal decided the right to paid holiday leave did not accrue during sickness absence. Previous cases decided that employees who requested holidays while off sick should be paid for them.

The Court of Appeal decision was a commonsense judgment that looked at why employees need to take leave. Its answer was, leave could only be taken from a period when the worker was actually working, and not from a period when the employee was not working.

However, the decision left unanswered questions, including: what was the position if the employee was not absent for the whole holiday year? And, what happened at the end of the holiday year, given that an employee has no right to carry over annual leave under the Regulations?

The case was referred to the European Court by the House of Lords so that these, and other issues, could be resolved. The European Court's decision was that: "Annual leave should accrue even when the worker is absent on sick leave. In the Court's view, entitlement to annual leave is not dependent on actually having worked in the relevant holiday year."

And: "The right to paid annual leave does not expire at the end of the relevant leave year where the worker has been absent due to ill health. Workers should be entitled to payment for all holidays which they have not been able to take, including from previous holiday years, where employment terminates."

At a time where employers are trying to cut costs, this decision will inevitably be seen as another blow for employers, and will lead to significant additional cost.

The matter will now be referred back to the House of Lords, which will be obliged to act in accordance with the judgment of the European court, and overturn the decision. The Lords will also set out whether the leave can be taken while the worker is off sick, or whether they would have to wait until a return to work.

Where a worker is absent for the whole year, their entitlement will accrue either until they return to work, or until termination of employment. If the leave cannot be, the worker will need to be paid in lieu on termination. Effectively, absent employees will be landed with a windfall.

This does not meet any health and safety objective, and the decision will not encourage employees back to work. It might, however, lead to long-term absent employees being dismissed with more haste. Employers have often let these employees sit "on the books" in the knowledge no great cost is being incurred. Paying statutory holiday entitlement for every year is a rather more immediate cost.

Employers that put in place insurance cover for employees will find they have additional costs to meet in respect of employees who, as the Courts and Tribunals have made clear, must be allowed to remain on the books during periods of long-term incapacity. Insurers may require to review their policies to take account of this development and ensure their product remains attractive.

One further point of concern for employers is that the House of Lords will also be required to decide whether claims for unpaid holiday pay can be claimed as a "deduction from wages". If so, claims could go back to when the Regulations were introduced in 1998.

There is a little good news for employers. The judgment does not have any impact on the treatment of holidays granted under the contract of employment, and the contract can continue to state they do not carry over into a future holiday year. That is the only light visible in this tunnel.

&#149 Stuart Neilson is a partner of McGrigors LLP.