Orrick Alert (UK Edition): Holiday Headaches Solved

With the summer holiday season upon us, we have compiled a sizzling selection of holiday-related questions which may be causing you headaches over this period.

Q:      What’s the difference between statutory and contractual 
          holiday?


The statutory rules on holiday rights are contained in the Working Time Regulations 1998 (the “Regulations”).  Under the Regulations, a worker is entitled to 5.6 weeks’ paid annual leave per year (equivalent to 28 days for a full-time employee and a pro-rata amount for a part-time employee), including public and bank holidays.

The Regulations lay down the minimum paid annual leave entitlement. However, the employer can choose to give a contractual holiday entitlement above the 5.6 weeks required by the Regulations. The contract of employment will set out the employee’s rights in relation to this more generous provision.

Q:      How soon can new employees take holiday?

Employees start to accrue statutory holiday from the moment that they start employment. During the first year of employment, the Regulations set out that annual leave will accrue at the rate of 1/12th of a full year’s entitlement at the beginning of each month and leave under the Regulations must only be taken after it has been accrued. This controls the taking of leave by a new employee and is designed to prevent an employee taking a large amount of holiday straight away. An employee will therefore accrue 1/12th of their annual leave entitlement on the first day of his or her employment. 

With additional contractual holiday entitlement, the accrual of holiday is determined by the contract of employment and if employers are concerned about a new employee submitting holiday requests straightaway, they may want to include a provision in the contract relating to restrictions (subject to statutory rights) on taking holiday during the first months of employment and the grounds on which the employer can restrict the right to take holiday.

Q:      Can we require an employee to repay any holiday taken in excess of their
          accrued entitlement on termination?


Yes but only if the contract expressly provides for this – there is no statutory or implied deduction provision of this nature otherwise and so it would mean a windfall for the departing employee unless the contract is clear.

Q:      Can an employer refuse an employee’s holiday request?

An employee will be able to take their accrued statutory leave whenever they choose, subject to them given an appropriate notice of this intention. However, employers have the right to refuse an employee’s request provided that the right notice of refusal is given. Contractually, the right to refuse will depend on the terms of the contract and a general concept of reasonableness so there should be a good business reason for the refusal and the contract should always make holidays subject to the line manager’s approval.

Q:        Do interns have any entitlement to holiday?

The status of interns can be far from straightforward. However, where an intern is contributing to an organisation, is carrying out the same tasks as other members of staff and in general is treated like any other employee, the chances are that they will fall within the definition of a “worker” in the Regulations and will therefore have a pro-rata statutory holiday entitlement, meaning that during the course of the internship they will accrue holiday in the same way as employees.

Q:        How are bank holidays dealt with for part-time workers?

This tends to be a tricky one for employers. There is no statutory right to paid public holidays, but most employers end up granting them to employees and workers as part of their holiday entitlement.  For part-time workers, some employers only give this benefit if the public holiday falls on the day on which the part-time worker would have worked. The risk of doing this is that it may treat part-time workers (for example, those who do not normally work on a Monday, which is the day when the majority of public holidays in the UK take place) less-favourably than comparable full-time employees because they will receive less holiday (pro-rata) than their full-time colleagues. Depending on the generosity of the contractual entitlement, it may also result in the employee receiving less than their statutory minimum entitlement on a pro rata basis. One way to avoid this risk from arising would be to give part-time workers a pro-rata entitlement to all public holidays as part of their overall pro rata holiday entitlement, which is an approach that has been recommended by the government. They would then be required to use that overall holiday for any public holidays on which their working days fall and could take any excess as general holiday.

Q:      Does an employer have to accept it if an employee cancels holiday at the last minute
          and wants to work instead?


Although it can be highly frustrating and potentially disruptive to an employer when an employee cancels holiday at short notice, the Regulations do not deal with this point and in practice, it is not a common provision in an employment contract. For employers seeking to avoid this type of situation from arising, one option would be to include a provision in the contract of employment or staff handbook requiring employees to take those booked days if they have not provided a certain amount of notice of withdrawal.

Q:      Do employees on sabbatical leave continue to accrue holiday?

Where the contract of employment remains in force during the sabbatical, employees will continue to accrue their statutory entitlement to annual leave. This is a result of a European case which held that an employee’s entitlement to statutory leave is unaffected by an absence from work. Any other contractual holiday entitlement may be suspended where the employee takes an extended period of leave, although this will be subject to agreement by the employee. In this respect, employers should ensure that they have a sabbatical policy in place setting out the terms of the sabbatical, with one of the terms being that contractual holiday does not accrue during any period of extended leave. Statutory holiday must, of course, be paid but where there are no normal working hours (arguably the case during sabbatical), this will be calculated based on the prior 12 weeks of pay (i.e. nothing, on unpaid sabbatical). Alternatively, where there are normal working hours, the pay is as documented in the contract of employment – provided that there is carefully drafted sabbatical documentation temporarily varying that contract, this could again be a nil amount. In either case, therefore, the employer could provide in the sabbatical documentation that holiday accrued during the sabbatical must be taken within the sabbatical period itself (and therefore arguably unpaid).

Q:      Do you have to include holiday in any payment in lieu of notice (“PILON”)?

Where there is an express PILON clause in the contract of employment, the amount due to the employee is calculated in accordance with the contract. An appropriately drafted PILON clause should limit payment to basic salary only. In such cases, the right to holiday pay is calculated up to the termination date, and the employee will have no right to accrue holiday (or to receive a payment in lieu of holiday that would have accrued) during what would otherwise have been the notice period. In the absence of a PILON clause, any payment in lieu is, in fact, a payment of damages for breach of contract and therefore should arguably include holiday pay which would have accrued during the notice period.

Q:      Does an employee accrue holiday whilst on long-term sick leave?

Yes - A recent and very long-running European Court of Justice (“ECJ”) case held that a worker’s entitlement to statutory holiday accrues during sickness absence and that workers should be given the opportunity to take annual leave, even if it meant carrying over the untaken leave into the next leave year. 

The question of how long untaken annual leave can be carried over has started to be addressed, with the ECJ in a recent case ruling that any carry over period must be substantially longer than the leave year, but that a limit of 15 months in that particular case was lawful in the circumstances. Although this has provided confirmation that employees on long-term sick leave do not accrue holiday indefinitely, employers should be cautious in imposing a limit, as there is still no definitive answer on how long the carry-over period should be (for example, in another case, a carry-over period of 9 months was found to be too short). 

Q:      Can an employee reschedule holiday due to sickness?

Yes - Another ECJ case held that a worker who is on sick leave during a period of pre-arranged holiday has the right to reschedule and take the holiday at a later date, even if that means carrying the leave over to the next leave year. The amount of leave which can be rescheduled will coincide with the actual period of sickness during the leave.

And finally….

The Court of Appeal has most recently held that a worker who was signed off sick for the entire leave year did not have to make a formal request to carry it over into the next leave year. It upheld the original tribunal’s decision that the worker was entitled to payment in respect of the untaken leave on the termination of her employment and that a failure to request annual leave or ask for it to be carried over at the time, did not mean that the worker lost her right to that payment (as had previously been thought).

Employers generally adopt a “use it or lose it” policy, to prevent employees from storing up their annual leave entitlement from year to year. This case has confirmed that workers on long-term sick leave will be an exception to this rule. Workers on long-term sick leave who are unable to take their annual leave will be able to carry over the untaken leave into the next leave year, regardless of whether or not they had requested it.  

This case is the latest in a long line and it illustrates the current tension that surrounds annual leave and the interaction with long-term sick leave. Part of the problem is that neither the Regulations, nor the European Directive that they implement, provide any significant guidance on what is increasingly becoming a complicated and challenging area of employment law, leaving it as a fruitful area for the national and European courts to develop. The government has proposed amending the Regulations to reflect the recent case law (in particular, the carry-over of annual leave will be expressly addressed and it will be interesting to see what limitation period the government opts for) and its response to the “Modern Workplaces” consultation is awaited. We will keep you updated with any future developments as they happen.

Published In: Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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