Withers Worldwide

The House of Lords gave its decision in the long running litigation over holiday pay and long term sickness absence on 10th June.

The European Court of Justice (ECJ), to which the House of Lords had referred various questions, had already decided many of the most important issues. The ECJ's decision was published in January 2009 (European Court of Justice rules on holiday and long term sick leave) and established that the fact that an employee is on long term sick leave does not mean that entitlement to paid holiday is lost. On the contrary, employees are entitled to be compensated in full for any holiday they have not been able to take because of sickness absence.

As a result of the ECJ judgment, the House of Lords was concerned principally with how employees can enforce their right to holiday pay. The Court of Appeal had previously said that the only correct way to bring a claim for holiday pay is under the Working Time Regulations, from which the right to paid annual leave derives. That had the effect of limiting the amount that employees could claim, because only one year's entitlement could be claimed at any time.

The House of Lords has overruled the Court of Appeal by holding that an employee can bring a holiday pay claim by way of a claim for deduction from wages under the Employment Rights Act. This greatly increases employers' exposure, because the employee can claim for all years for which he or she has not received holiday pay. This decision also sidesteps the question of whether the Working Time Regulations would need to be changed before employees in the private sector could benefit from the ECJ decision. Public sector employees immediately benefited from the direct effect of the decision on any employer that is an ‘emanation of the state'.

Certain issues still need to be ironed out. For example, the reversal of the Court of Appeal judgment means that the guidance tribunals should now follow derives from three separate cases in the Employment Appeal Tribunal decided in 2002 and 2003. One crucial practical question on which these cases do not agree is that of whether an employee has to ask for annual leave before the entitlement arises. It is likely, given the ECJ's views, that the answer to this is that the right exists whether or not the employee asks, but this is not entirely clear.

Also unclear is how the rights of an employee receiving a proportion of salary under a permanent health insurance (PHI) scheme are affected. The combined effect of the ECJ and House of Lords decisions is that an employee could ask for a period equivalent to statutory holiday entitlement to be taken out of long absence on PHI and designated as a period of annual leave - and thus to be paid in full for it. The insurer will not be liable for topping the payment up to full salary levels so this will fall to the employer. But that also raises the issue of how this might affect the status of the employee as an insured person.

In light of the judgment employers in both the private and public sectors should:

• review their sick pay policies and consider whether they need to change the way in which they treat their employees on long term sick leave in relation to holiday pay in light of the judgment;
• check with their providers of PHI how they intend to deal with the effect of the judgment (it may not be in the employee's best interest to insist on taking a period of holiday during a an absence on PHI);
• consider carefully whether they are making proper provision for holiday pay for atypical workers such as ‘independent consultants' or casual workers. Such persons are entitled to paid holidays unless they are genuinely in business on their own account. In light of today's ruling a miscalculation on that front could be very expensive.