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Home | Paid annual leave during sick leave: ECJ's decision in Stringer v HMRC

Paid annual leave during sick leave: ECJ's decision in Stringer v HMRC

10 February 2009

In this article we consider the practical implications of the decision in Stringer for employers.

In the case of Stringer v HMRC, the Court of Appeal held that employees on sick leave did not accrue annual leave during the time they were not working, and therefore were not entitled to holiday pay while on sick leave or to be paid in lieu of annual leave on the termination of their employment.

The employees appealed against this decision to the House of Lords, which referred certain questions concerning the interpretation of the Working Time Directive to Europe.

The European Court of Justice (ECJ) delivered its final decision on 20 January 2009. The case must now return to the House of Lords to be considered further. We are therefore still some way from a conclusive position. We know that the UK will have to comply with the ECJ's decision, but the open question remains how this will be done.

Employers therefore have a short breathing space to consider how to respond to the judgement, and how they can mitigate the inevitable increase in costs which it entails. 

In Stringer the ECJ held:

1. Workers absent on sick leave do accrue the right to paid annual leave during such time.
2. A national rule which prevents workers actually taking paid leave during sick leave is not unlawful, as long as the worker has the right to take their leave at another time (i.e. when they return to work).
3. On the other hand, a national rule which allows workers to take paid annual leave during sick leave is also allowed (this is in contrast to the position for maternity leave, which cannot be ‘mixed' with annual leave).
4. It is not lawful for national laws to provide that the right to annual leave is lost at the end of a leave year where the worker has been on sick leave for the whole leave year. 
5. A worker who is absent for the whole leave year and so does not have the opportunity to take their leave, must be allowed to carry over their leave to the next leave year (this principle must also apply by extension to those on maternity leave).
6. However, a national rule which provides for the loss of the right to paid leave at the end of a leave year is lawful as long as the employee has had the opportunity to take their leave.
7. On the termination of employment, the worker is entitled to a payment in lieu in respect of their accrued leave.
8. The amount of any paid holiday or payment in lieu must be at the worker's normal rate of pay.  

The UK's current Working Time Regulations (WTR) provide, at regulation 13(9), that leave must be taken in the year in which it is due. It will be for the House of Lords to decide whether it can interpret the WTR consistently with the ECJ's judgement in Stringer, possibly by ‘reading-in' words to the existing law. However, if it feels that it cannot do so, new legislation will be needed, and this may be some time in coming.

Although we would not expect any change to the law to have retrospective effect, public sector employees can already rely on the ECJ's decision because of the doctrine of ‘direct effect'. This is not the case for employees in the private sector, where the WTR continue to apply as interpreted by the Court of Appeal.

Employer's checklist

Employers should start to prepare themselves for change in this area following the House of Lords' final decision in Stringer. They may wish to consider the following issues now:

• 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 this ruling.
• What steps can your 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 will 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.
• Review current holiday terms and policies. If reference is made to untaken holiday being lost at the end of the leave year, this will have to be amended to carve out those on sick leave.
• The UK's minimum paid holiday entitlement is rising to 28 days in April 2009 (for a full-time worker), and some employers have even more generous contractual holiday benefits. However, the ECJ's decision only applies in respect of the statutory minimum annual leave entitlement in the Working Time Directive of four weeks. Will you be able to restrict any holiday which accrues during sick leave to a maximum of four weeks holiday? If so, changes to terms and policies are likely to be required to make this clear.
• If the House of Lords rules that workers can actually take and be paid for annual leave during sick leave, consider whether you will insist that workers take their accrued leave while off sick (if you have a generous sick pay scheme it will economical to do this rather than wait for the worker to exhaust their paid sick leave and then ask for paid annual leave). If you take this approach, consider how you will actually implement this (e.g. will you give workers notice to take their leave after so many months off sick?)
• Alternatively, you may consider whether as a matter of policy you will not allow workers to take and be paid for annual leave while on sick leave (as this may act as an incentive for employees 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:

• 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 entails 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 will obviously be problematic, because you cannot impose such changes unilaterally; the employees must agree. If you force through significant changes, the employee may claim breach of contract and/or resign, and claim constructive dismissal.

Clearly there is lots for employers and their advisers to think about. If you would like to discuss your organisation's response to this case please get in touch!

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

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Peter Duff

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