A number of significant findings have been made by the Court of Appeal in a decision given on 22 April 2005 in the case Commissioners of Inland Revenue v Ainsworth and Others.

The Inland Revenue appealed five decisions, one involving the ongoing payment of holiday pay to an employee on long-term sick leave, four others involving the payment of holiday pay on termination of employment after a long period of sickness absence.

The key issues considered by the Court of Appeal were:

1. Is a worker entitled to paid holiday leave while absent from work due to sickness and no longer entitled to sick pay?
   
   
2. Can entitlement to holiday pay be enforced only under the provisions of the Working Time Regulations or can they alternatively be treated as an unauthorised deduction of wages under the provisions of the Employment Rights Act 1996?

The findings of the Court of Appeal have an impact on the reasoning behind a number of different Employment Appeal Tribunal (EAT) decisions in recent years. Before examining the Court of Appeal's examination of these issues, it will be helpful to review some of the earlier EAT decisions.

The story so far…
The Working Time Regulations 1998 (WTR) provide an entitlement to four weeks' paid holiday leave to "workers". Employees are workers in this context, but the term also encompasses contractors if they do not have a business structure and a number of clients. Agency workers are also entitled to the rights provided by the WTR. If any such workers do not receive their entitlements to holiday leave and holiday pay, they may, under the provisions of regulation 30 of the WTR, take a case to an employment tribunal within three months of the alleged breach.

In the case Kigass Aero Components v Brown, heard in 2002, the EAT ruled that, under the provisions of the WTR,

• there is no pre-condition that a worker must be at work before taking holiday leave, as there is, for example, in the case of rest breaks
  
  
• the only pre-condition defined in the Regulations is that a worker must give the appropriate advance notice to the employer to take holiday leave, either that defined in the contract or the defined statutory notice period
  
  
• therefore, a worker absent from work on medical grounds may give notice to take paid holiday leave and, on completion of that leave, return to sick leave.

However, the EAT also pointed out that its conclusions "have possibly unintended social and employment consequences. Employers may be driven to terminating employment rather than letting it continue where there is a long term sickness absence. To avoid the risk of that happening employees on long term sickness leave may report back to work earlier than is medically desirable….it is hard to be sure that the effect to which we have arrived is truly (as far as the legislature is concerned) a considered and intended effect. That, though, as it seems to us, is a matter not for us but for the legislature."

Also in 2002, the EAT considered an appeal against the decision of an employment tribunal in the case List Design Group Ltd v Douglas and Others. The claim by Mr. Douglas and three others that they were entitled to paid holiday leave under the provisions of the WTR could not succeed if it were brought under the provisions of regulation 30 of the WTR as it was out of time. However, if the claim were brought under the "deductions from wages" provisions of section 23 the Employment Rights Act 1996 (ERA) the claim would be in time as, in a situation where there has been a series of unlawful deductions, the three month condition applies from the date of the last deduction.

The definition of "wages" in section 27 of the ERA includes "holiday pay" that is "payable under [the worker's] contract or otherwise". Although the WTR became law after the ERA, the EAT agreed with the original tribunal's decision that:

• the holiday pay due to the workers was 'payable otherwise' under the WTR provisions
  
  
• by withholding holiday pay, the employer had made deductions from wages
  
  
• the employer had made a series of such deductions
  
  
• the provisions of the ERA are not replaced by the WTR, otherwise there would have been amendments to the legislation at the time
  
  
• the workers were entitled to holiday pay backdated to October 1998 when the WTR became law.

In 2004, the EAT applied the List Design decision in the case Canada Life v Gray and Farrar, where the two commission agents were held to be "workers", entitled therefore to paid holiday leave throughout the period between October 1998, when the WTR came into force, and October 2002, when their employment was terminated. The EAT again confirmed the decision of the original employment tribunal that they had suffered a series of unlawful deductions from their wages and they were awarded compensation of £30,000 and £19,000.

Holiday leave and pay while on extended sickness absence
The current decision in the case Commissioners of Inland Revenue v Ainsworth and Others is an appeal from an EAT decision in 2004. That, in turn, was an appeal against the decisions of a number of employment tribunals, all of which revolved around the issue of whether workers are entitled to paid holidays while on extended sickness absence or on termination of employment at the end of an extended period of sickness absence. Those tribunal decisions had been made in the light of the decisions made by the EAT in the Kigass case.

The decision of 2004 EAT, after considering the issues raised by the employment tribunals, declined to reconsider the decisions that had been reached by the EAT in the List Design and Canada Life cases. It stated that "If Kigass is to be changed, it must, in our judgment, be done by the Court of Appeal, who will take into account also whether there needs to be reconsideration of overruling, or at any rate, distinguishing List Design and Canada Life, while doing so, if they are to overrule Kigass, or at any rate to limit its consequences." It added that "it may be that this whole question can only be resolved by legislation".

All of these issues, including the use of the "deductions from wages" provisions of the ERA to enforce the WTR rights, were considered in detail by the Court of Appeal.

The Court took the view that the right to annual leave, as defined in regulation 13 of the WTR, cannot refer to leave from sickness absence. The word "leave" in its natural sense is to a release from what would otherwise be an obligation. What obligation does a person who is absent due to sickness take leave from? Holiday leave is a health and safety provision and there is no health and safety benefit from taking holiday while on sick leave. The results from granting paid holiday leave to workers on extended sick leave are, in most cases, a windfall and the potential for the wholly undesirable consequences foreseen by the EAT in Kigass.

Consequently, the Court of Appeal has now removed any obligation for an employer to treat an worker as entitled to paid holiday leave under the WTR rules who

• is on long-term sickness absence, and
  
  
• has been unable to attend work throughout the holiday year.

It should be noted that this decision only applies where a worker has been absent on sick leave throughout an entire holiday year.

Termination holiday pay at the end of extended sickness leave
Having found that a worker on extended sickness leave is not entitled to paid holiday leave, it was not difficult for the Court to go on to conclude that, where the employment of such an worker is terminated, it would be inconsistent for there to be a right to payment for holiday leave on termination.

However, in order to justify that conclusion, the Court had to consider the application of regulation 14 of the WTR, where the rules for calculating termination holiday pay are set out. Unless there are alternative rules set out in a contract of employment, the calculation is defined as

The difficulty here is in the wording used to determine an worker's annual entitlement, i.e. value 'A'. The regulation 13 entitlement, other than where employment starts part way through a holiday year is "four weeks' annual leave in each leave year". In the case of extended sickness leave, can the annual entitlement in this calculation be taken to be nil?

In a holiday year during which a worker has had a period of sickness, there is no provision for reducing the four weeks' entitlement by the period of sickness absence. For example:

• A worker's holiday year runs from January to December. The worker is sick for the first six months of the holiday year and is then dismissed. No holiday leave was taken during the six months. There is no specific provision to treat value 'A' as anything other than 4 weeks, giving an entitlement to termination holiday pay of 2 weeks.
  
  
• A worker with the same leave year is off sick for the first three months, returns to work for a further three months and is then dismissed. No holiday was taken in the six months. There is no provision to reduce value 'A' to take the three months of sickness into consideration. The termination holiday pay entitlement is also 2 weeks.

These are examples that the Court of Appeal considered of the anomalous situations that arise in applying the regulation 14 rules if the effect of sickness absence is taken into consideration when calculating termination holiday pay. However, while accepting that some problematic situations can arise in circumstances that have been complicated by absence through sickness, the Court of Appeal decided that the termination holiday pay calculation should be based on the Court's new interpretation of a worker's regulation 13 entitlement. If, due to extended sickness absence, a worker's annual entitlement is nil, then the termination holiday pay calculation should reflect that. The Court stated: "It is important not to lose sight of the fact that, in the great majority of cases, regulation 14 will be uncomplicated by periods of absence through sickness and will produce the rateable compensation which is intended. To that significant extent, it is entirely workable. To the extent that it may produce some unfortunate anomalies in sickness cases, it may merit consideration of legislative amendment at an early date."

Accordingly, in the case of extended periods of sickness absence, the Court of Appeal decided that, if there is no entitlement to holiday pay during the sickness absence, there is also no entitlement to termination holiday pay.

Using to ERA to enforce working time rights
The List Design and Canada Life cases were decided on the premise that holiday leave and pay rights under the WTR can also be enforced under the deduction of wages provisions of the ERA.

The ERA's provisions were introduced in 1996, although they have their origin in earlier Wages Act rules. Included in the definition of the "wages" that are protected from deductions is "holiday pay" that is "payable under [the worker's] contract or otherwise". The Court of Appeal considered whether the term "otherwise", as used in this definition, can include the statutory holiday pay as provided for in WTR, as introduced in 1998.

The Court accepted the argument that regulation 30 of the WTR was intended to provide a single and exclusive regime for the enforcement of the WTR rights. The provisions of the 1996 ERA were enacted when the WTR rights did not exist and the Court did not think that "otherwise" could refer to a subsequently created statutory right that comes with its own enforcement regime. The Court enforced this interpretation by referring to section 205(2) of the ERA which, in the context of the enforcement of the deductions from earnings rights, states that the remedy for a contravention is by a complaint under section 23 "and not otherwise". In other words, the WTR enforcement provisions cannot be used to enforce any of the ERA rights.

Accordingly, the Court of Appeal found that the List Design and Canada Life cases were wrongly decided. The implications of this finding is that a failure on the part of an employer to pay statutory holiday pay over a number of years cannot be addressed under the ERA provisions as a series of deductions from wages. The only way of enforcing the payment of statutory holiday pay is through the WTR provisions, where enforcement is only possible if a claim is made within three months of a specific breach. For example,

• a failure to pay holiday in respect of a period of holiday leave can be addressed if a claim is made within three months of the date on which the payment was due
  
  
• a failure to pay holiday pay on termination can be addressed if a claim is made within three months of the date of on which the payment was due.

The three month period can be extended to six months where it was not reasonably practicable for the complaint to have been made within three months.

Rolled-up holiday pay
The Court of Appeal did not give any consideration to the issues surrounding rolled-up holiday pay. This is the practice of paying holiday pay in instalments throughout the year at the same time as wages, rather than paying it at the time that the holiday is taken. The practice is not lawful in Scotland. However, it is currently permitted in England and Wales where the strict guidelines set out by the EAT in the case Smith v Morrisroes & Sons Ltd are followed. However, the overarching issue, whether the practice of rolling-up holiday pay into a worker's rate of pay is lawful under the provisions of the WTR, is currently before the European Court of Justice, following a referral by an employment tribunal in the case Robinson-Steel -v- R F Retail Services Ltd.

Author's personal comments
I am usually happy with decisions made by the Court of Appeal. They are normally well reasoned and reflect a careful consideration of what the law actually says. However, I find the decision in the case of this appeal brought by the Inland Revenue very unsatisfactory.

The law does not always say what we would like it to say. However carefully a statute may have been drafted to reflect all of the issues known at the time, new factors come along that can produce undesirable results. If that happens, the correct course is to amend the legislation, not to interpret the existing legislation in a way that was not originally intended.

There is no question that the application of regulations 13 and 14 of the WTR gives undesirable results where workers are on long-term sickness absence. The reasoning of the Court of Appeal appears to work backwards from the acknowledgement of those undesirable results. The approach seems to be that "there is a problem here so, in order to remove the problem, we must interpret the legislation in a different way".

The approach taken by the EAT in the Kigass case was that the provisions of the WTR apply to "workers". A "worker" is an individual "who has entered into or works under…a contract of employment…" The EAT said "That does not appear to import any requirement that in order to be a "worker" some work needs to have been done or that some attendance to do work should have occurred, either within any particular period or at all." Having established that an individual is a worker and that there are no additional attendance conditions set in the regulations, it follows that a worker who is absent on extended sick leave continues to be a worker. There is therefore entitlement to the WTR's paid holiday leave provisions.

The Court of Appeal took a different approach. The argument is in reverse. It said: "The Employment Appeal Tribunal in Kigass was distracted from this analysis by emphasizing the definition of "worker" at the expense of concentration on the concept of "leave". Because the Kigass decision gives undesirable results, the term "leave" cannot apply to workers who are on long-term sick absence. It does not matter that the person is still a "worker" because you cannot take leave from sickness absence. Therefore, even though regulation 13(1) says that a worker is entitled to four weeks' annual leave each year and the only exception is for a worker who has not worked for a full holiday year, a further exception must be assumed if the worker is on long-term sick leave. In that situation, the annual leave entitlement is nil.

It is this further exception that concerns me most. The only reference to sick leave in the WTR and the source European Directive is in connection with the averaging of working hours in a reference period. There is no mention whatsoever of an exception for sickness absence, whether short-term or long-term, in the context of holiday leave and pay. The Court of Appeal has not only inferred such an exception in the regulations but has also defined a rule that says that the exception only applies if a worker has been absent sick from work for a full holiday year.

So, for example, a worker's annual entitlement to holiday leave is nil if the sickness absence is for the full holiday year but four weeks if the sickness absence is for eleven months of the holiday year. If there is a problem in giving holiday pay to a worker who has been absent for a whole year, is there not also a problem if the absence is for less than a year. If a line has to be drawn, why a year - why not nine months, or six months?

The Court of Appeal points out correctly that there are problems in applying the holiday pay rules in any case where a worker has been absent sick, whether the EAT's approach in Kigass is used or in the Court of Appeal's new approach. The concluding comments of Lord Justice Maurice McKay, the judge who wrote the decision, are significant:

"On the more important issues of the proper construction of regulations 13 and 14, it seems to me that, whatever that construction may be, it is productive of potential anomalies. They are confined to some but not all or even most cases with a sick leave complication. In the factual matrices of the present appeals, which seem to be fairly typical of leave cases complicated by sickness, I find no injustice in the application of the constructions which I consider to be the correct ones. If more meritorious anomalies are indeed numerous, then they can only be cured by legislative amendment. I take comfort from the fact that there would have been at least as cogent a need for amendment if the contrary view were to be taken of the proper construction of regulation 13 and/or regulation 14."

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...back to 5 May 2004

Sources:
England and Wales Court of Appeal (Civil Division) Decisions