England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT
APPEAL TRIBUNAL (MR JUSTICE BURTON)

		Royal Courts of Justice Strand, London, WC2A 2LL
		22 April 2005

Lord Justice Maurice Kay :

1. These appeals raise an important point in relation to the Working Time Regulations 1998. It relates to employees who are absent from work for a substantial period of time as a result of ill-health. It often happens that an employee remains absent for a longer period than that for which he is entitled to payment under the statutory sick pay scheme and any more generous contractual extension of it. Typically, in the Civil Service a sick employee is entitled to six months on full pay followed by six months on half pay. Thereafter he may be entitled to a further reduced rate or no pay at all for as long as he remains an employee. The question that arises is whether, after the exhaustion of his entitlement to sick pay, an employee who remains on the books of his employer but continues to be absent from work by reason of ill health is nevertheless entitled to receive holiday pay pursuant to the Working Time Regulations for as long as his employment endures, notwithstanding his total absence from the workplace. The question may arise in two circumstances. The first is where the employment continues unbroken and the claim for holiday pay is made whilst the relationship subsists. The second is where the employer eventually terminates the employment relationship on grounds of ill health and the employee makes a claim in relation to the period immediately preceding the termination. Of the five appeals before us, that of Mrs. Khan falls into the first category but the other four fall into the second category.
2. In Kigass Aero Components Limited v. Brown [2002] ICR 697 the Employment Appeal Tribunal decided that employees who are away from work on long term sick leave and who are no longer receiving any pay because they have exhausted their sick pay entitlement are nevertheless entitled to claim up to four weeks' holiday pay per year under the Working Time Regulations. The judgment extended to both of the two categories to which I have referred. When the employees in the present appeals applied to secure similar entitlements, the Employment Tribunals and the Employment Appeal Tribunal inevitably considered themselves bound to follow Kigass. In each case, the Employment Appeal Tribunal granted the Inland Revenue permission to appeal so that this difficult issue might be considered for the first time in the Court of Appeal. Put simply, the Inland Revenue invites this Court to hold that Kigass was wrongly decided. That is the main issue before us. In addition the Inland Revenue, in respect of the appeal of Mr. Ainsworth, invites us to consider a separate point of less but nevertheless some importance. The second point is whether applications to enforce entitlement to holiday pay under the Working Time Regulations can only be pursued as applications under regulation 30 or whether they can also be made as applications in respect of unauthorised deductions of wages under Part II of the Employment Rights Act 1996. In List Design Group Limited v. Douglas [2002] ICR 686 the Employment Appeal Tribunal held that such claims could be made under either Act. The case for the Inland Revenue is that List Design was wrongly decided.

The Kigass Point

3. Although the entitlement with which this case is concerned is often referred to as "holiday pay", that expression does not appear in the Working Time Regulations. The provisions of the Regulations with which we are concerned fall within Part II. Having dealt with such things as maximum weekly working time, night work, daily rest, weekly rest and rest breaks, the remainder of Part II is concerned with "entitlement to annual leave". Regulation 13 (as amended by the Working Time (Amendment) Regulations 2001) includes the following provisions:

"(1) Subject to paragraph (5), a worker is entitled four weeks' annual leave in each leave year

……

(9) Leave to which a worker is entitled under this regulation may be taken in instalments, but –

(a) it may only be taken in the leave year in respect of which it is due, and

(b) it may not be replaced by a payment in lieu except where the worker's employment is terminated."

Regulation 14 is headed "Compensation Related to Entitlement to Leave". It is concerned with entitlement where the employment is terminated during the course of a leave year. It provides:

"(1) This regulation applies where –

(a) a worker's employment is terminated during the course of his leave year, and

(b) on the date on which the termination takes effect…., the proportion he has taken of the leave to which he is entitled in the leave year under Regulation 13 differs from the proportion of the leave year which has expired.

(2) Where the proportion of leave taken by the worker is less than the proportion of the leave year which has expired, his employer shall make him a payment in lieu of leave in accordance with paragraph (3)."

Paragraph (3) then provides a formula for calculating a rateable entitlement in those circumstances.

4. Regulation 15 lays down procedural requirements in relation to the taking of leave. It permits a worker to take leave to which he is entitled under regulation 13 on such days as he may elect by giving notice to his employer in accordance with regulation 15(3), "subject to any requirement imposed on him by his employer under paragraph (2)". Paragraph (2) enables the employer to require the worker (a) to take leave to which he is entitled under regulation 13 or (b) not to take such leave, on particular days, by giving notice to the worker in accordance with paragraph (3).
5. Regulation 15A deals with entitlement to leave during the first year of employment. Regulation 16 provides for the calculation of the payment in respect of periods of leave, adopting the provisions of sections 221 – 224 of the Employment Rights Act 1996 in relation to the calculation of "a week's pay".
6. In Kigass the Employment Appeal Tribunal (Lindsay J (President) Mr. H Singh and Mrs RA Vickers) considered three appeals, two of them by reference to regulation 13, the other under regulation 14. It concluded that the entitlement to annual leave under regulation 13 arose regardless of whether any work had been done or any attendance to do work had occurred during the relevant period. It also rejected an argument that entitlement to a compensatory payment under regulation 14 could only accrue where the worker had put in some "working time" during such a period. The following propositions emerge from the judgment:

(1) The term "worker" is defined in regulation 2(1) so as to mean an individual "who has entered into or works under….(a) a contract of employment…." 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." (paragraph 5).

(2) 'Working time' is defined in regulation 2(1) so as to mean '(a) any period during which he is working, at his employer's disposal and carrying out his activities or duties, (b) any period during which he is receiving relevant training, (c) any additional period which is to be treated as working time for the purposes of these regulations under a relevant agreement; and 'work shall be construed accordingly'. Regulation 13 makes no reference to any 'working time' as having been needed to have been served as a prerequisite for entitlement (paragraph 5).

(3) Regulation 13 includes nothing equivalent to the words 'during which he works for his employer' which are found in regulations 10 and 11 as describing the periods over which 'daily rests' and 'weekly rest periods' accrue to an employee. "Plainly the legislature found it easy enough expressly to import the doing of work as a precondition of the accrual of particular rights being dealt with when it wished to do, which makes the absence of any corresponding provision in regulation 13 so striking."(paragraph 6)

(4) [In answer to the submission that annual leave is and is only leave to be absent from what would otherwise been working time], "that will no doubt, generally be the case but there is no express provision in the Regulations to such effect nor any necessity to imply one." (paragraph 11).

7. In the concluding paragraph of the judgment (paragraph 53) the Employment Appeal Tribunal stated:

"We do have some doubt as to whether, if the legislators had been interrupted during their framing of these Regulations and had been told that the conclusions to the questions that we have had raised before us would be as we had given them, they would have agreed that was, indeed, their intention. It can be seen that the conclusion at which we have arrived does 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. "

In the present case the Employment Appeal Tribunal (Burton J (President), Mrs. L Tinsley and Mr M Worthington) considered it inappropriate for there to be further consideration of the issue at that level. It said:

"If Kigass is to be changed, it must, in our judgment, be done by the Court of Appeal….but it appears to us for the purposes of giving permission to appeal to the Court of Appeal, which we do, that [counsel] must have at the least an arguable case that Kigass….should be reconsidered in a court which has the undoubted jurisdiction to do so."

8. On behalf of the Inland Revenue Mr. Underhill QC makes the following submissions. First, he submits that Kigass was fatally flawed by the emphasis on the definition of "worker" rather than on the undefined concept of "leave". The natural meaning of "leave" connotes a release from what would otherwise be an obligation. This fundamental submission is put as follows in Mr Underhill's skeleton argument:

"It is contrary to all ordinary usage for a worker who is off work for a year or more as a result of serious illness to say that during some arbitrarily chosen part of that period he is taking 'leave' – leave from what?"

Secondly, the purpose of regulation 13, reflecting the purpose of the Working Time Directive of 1993 which conditioned it, is related to health and safety. It provides for release from the pressures of daily work. An employee who is not in any event required to work during the period in question stands to gain no benefit to his health by taking leave. An arbitrary payment of four weeks' money in relation to a period of notional holiday, at a time when the employee is not otherwise earning anything, is simply a windfall. Thirdly, if Kigass is correct, it would be open to an unscrupulous employer to use his powers under regulation 15(2) to compel an employee to take his holiday at a time when he already has leave of absence because of sickness. Fourthly, the purpose of the notice requirement in regulation 15 is to enable the employer to plan ahead so as to cope with the holidays of his employees. Where an employee is a long-term absentee for another reason, there is no need for the notice requirement. Fifthly, as was acknowledged in the concluding paragraph of the judgment in Kigass, the interpretation there adopted is likely to have undesirable consequences: employers will be less inclined to keep sick employees on the books and, fearing that, some employees may feel driven to return to work before they should. Sixthly, if Kigass is correct, it has consequences beyond the confines of long-term sickness. It impacts on, for example, consensual career breaks in precisely the same way and employers would be less likely to countenance them if there were a hidden and unjustified cost of four weeks' pay per year. Seventhly, it is essential to concentrate first on regulation 13. It, and not regulation 14, is the basic, general provision. Whilst "leave" undoubtedly has the same meaning in both regulations, the proper construction of regulation 13 should not be skewed by the possibility of consequential anomalies in the application of regulation 14.

9. Mr Ford attempts to meet these submissions with the following arguments. First, a person who is already on one type of leave, in particular long-term sick leave, may nevertheless have continuing obligations such as to keep his employer informed about his situation, to attend for medical examination and to respond to reasonable requests for information. It is only by designating a period of leave under regulation 15 that a worker can obtain temporary release from such obligations. Secondly, the aids to construction relied upon in Kigass are soundly based. Thus, it is significant that the definition of "worker" is not confined to one who is actually working under, but includes one who has simply "entered into" a contract of employment. Similarly, it is significant that the rights conferred earlier in the Regulations in relation to such matters as "daily rests" and "weekly rest periods" are expressly limited to periods "during which he works for his employer". The absence of such words from regulation 13 is no accident. Thirdly, (and Mr Ford places considerable emphasis on this), if he is correct in his construction of regulation 14 – to which I shall return – this construction should also impact upon the meaning of regulation 13. Fourthly, there are resulting anomalies and probably unintended consequences whichever construction is adopted.
10. I entirely accept that fourth submission, in relation to both regulation 13 and regulation 14. As Lindsay P said in Kigass (at para 21):

"…..the questions of construction before us cannot ultimately be decided by reference to a balance of comparative anomalies but to the language used in the Regulations."

11. Focusing on the language and its context, I have come to the conclusion that the construction contended for by Mr Underhill is the correct one. I say this for the following reasons. I accept that the key word in regulation 13 is "leave". It is, after all, what regulation 13 is about. According it the importance that it therefore has, it seems to me that the rhetorical question posed by Mr Underhill:-leave from what?-is instructive and the sensible answer to it is the one which he proposes. 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". I also attach significance to the context and purpose of the Regulations and the Directive to which they seek to give effect. Article 1 of the Directive makes it clear that its purpose and scope are to prescribe "minimum health and safety standards for the organisation of working time". The Regulations were enacted pursuant to section 2(2) of the European Communities Act 1972. They must be construed in the light of that authority and limitation. For the reasons submitted by Mr Underhill, the construction advanced on behalf of the respondents serves no health and safety purpose. It simply produces a windfall in most cases and runs the serious risk of the wholly undesirable consequences foreseen by the Employment Appeal Tribunal in Kigass. Unlike that Tribunal, I do not feel driven to a different conclusion by the fact that, when addressing such rights as "daily rests" and "weekly rest periods", the Regulations refer to periods "during which he works for his employer", whereas such words are absent from regulation 13. I find force in Mr Underhill's submission that, whilst the earlier rights and the regulation 13 right all fall within Part II of the Regulations, they respectively differ in kind. Matters such as "daily rests" and "weekly rest periods" are essentially "micro" matters which arise naturally throughout employment. Annual leave is more of a "macro" matter, such that there is a natural break between regulation 12 and regulation 13.
12. Although I also attach some significance to Mr Underhill's third, fourth and sixth submissions (as I enumerated them in paragraph 8), they are, as I think he concedes, less compelling than the ones which have informed the above conclusions. On the other hand, I consider that he is undoubtedly correct to submit that regulation 13 is the central provision on entitlement to annual leave and that its construction should not be driven by any perceived problems with regulation 14. That would be to allow the regulation 14 tail to wag the regulation 13 dog. For all these reasons, I accept the construction of regulation 13 advanced on behalf of the Inland Revenue and would allow the appeal in relation to the case of Mrs Khan. I next turn to regulation 14.
13. If, for the reasons I have given, a worker on long-term sick leave is not entitled under regulation 13 to four weeks' annual leave in a year when he has not been able to attend for work, it would be surprising if he were to become entitled to compensation under regulation 14 upon the termination of his employment during such a year. Put another way: if, of the present respondents, Mrs Khan has no entitlement under regulation 13, why should Mr Ainsworth, Mrs Kilic, Mrs Stringer and Mr Thwaites qualify under regulation 14? There is an obvious relationship between regulations 13 and 14. Regulation 14 is built upon the concept of leave to which the worker "is entitled in the leave year under regulation 13" (regulation 14(1)(b)). If, immediately prior to termination, there was no such entitlement because of the proper construction of regulation 13,should not a consistent construction of regulation 14 produce a similar result? In Kigass the three cases under consideration included one post-termination regulation 14 case but, because of the construction held to be correct in relation to regulation 13, there was no consideration of the argument about a possible differential approach to regulation 14 such as has been rehearsed before us.
14. Mr Ford's submission is an ingenious one. It is that, regardless of the meaning of regulation 13, the key to understanding regulation 14 is to be found in regulation 14(3). If at the termination date the proportion which the worker has taken of the leave to which he is entitled in the leave year under regulation 13 is less than the proportion of the leave year which has expired, he is entitled to a payment in lieu of leave "in accordance with paragraph (3)" (regulation 14(2)). Regulation 14(3) is then in these terms:

"The payment under paragraph (2) shall be -

(a) such sum as may be provided for the purpose of this regulation in a relevant agreement, or

(b) where there are no provisions of a relevant agreement which apply, a sum equal to the amount that would be due to the worker under regulation 16 in respect of a period of leave determined according to the formula -

(A x B) – C

where –

A is the period of leave to which the worker is entitled under regulation 13

B is the proportion of the worker's leave year which has expired before the termination date, and

C is the period of leave taken by the worker between the start of the leave year and the termination. "

I have emphasised the crucial words.

15. Mr Ford submits that, in order to be workable, that formula must assume that the relevant period of leave under regulation 13, i.e. A in the formula, is four weeks, even if the worker is off sick at the date of termination. Indeed, it is always four weeks except where regulation 13(5) applies in a "first leave year" case. In the course of submissions, numerous hypothetical situations were advanced by counsel on both sides so as to illustrate possible anomalies and shortcomings resulting from one construction or the other. Mr Ford highlighted these examples in his skeleton argument:

"(1) A worker with a leave year from 1 January to 31 December is off sick for six months from 1 January. He is dismissed on 30 June. He had not applied to take any leave during that six month period under regulation 15. He might recover during the time after the dismissal or he might not. Item A cannot be nil because he might so recover. But nor is there any provision in the formula for a discount. The calculation can only sensibly assume that A – the period of entitlement under regulation 13 – is four weeks, so as to produce an entitlement to compensation based on two weeks' leave rather than none.

(2) A worker with the same leave year is off sick from 1 January until 31 March, returns to work from 1 April until 30 June, at which time his employment is terminated. He, too, had made no application for leave under regulation 15. Again, the only sensible quantification of A is four weeks. It is unworkable to assume that A should be reduced to reflect the time off sick. Should it be discounted by 50 per cent to reflect the fact that he was off for half of the six months or by 25 per cent to reflect the fact that he was off for one quarter of the leave year, only half of which had expired at the termination date?"

16. Mr Ford uses these and other examples to fortify his submission that "leave to which he is entitled in the leave year under regulation 13" in regulation 14(1) and "period of leave to which the worker is entitled under regulation 13" in regulation 14(3) mean simply the four week period provided by regulation 13 (or the lesser period which arises in the "first leave year" under regulation 13(5)). He argues that to contend that the period is affected by events prior to termination, such as absence through sickness, or by possible subsequent events, does violence to the language of regulation 14 and undermines its purpose.
17. Mr Underhill's answer to all this is a simple one. If, properly construed, regulation 13 would have provided a worker with a nil entitlement prior to termination then, for the purposes of regulation 14(3), A is nil and the regulation 14 entitlement on termination is nil.
18. Ironically, although both counsel started their submissions from the shared assumption that what goes for regulation 13 should also go for regulation 14 and vice versa, by the end of the hearing each was openly contemplating the possibility that he might be right about one of these two regulations but wrong about the other. Moreover, Mr Ford's intricate submission was not ventilated in Kigass, where only one of the three appeals was a regulation 14 case and its determination in favour of the employee was largely conditioned by conclusion of the Employment Appeal Tribunal about regulation 13.
19. I confess that I see some force in Mr Ford's submission. Unless he is correct, some meritorious applicants for compensation under regulation 14, whose circumstances have been complicated by absence through sickness, may fall through the net. Nevertheless, I have come to the conclusion that, if possible, regulation 14 should be construed consistently with regulation 13. 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.
20. In reaching this conclusion I feel able to reject Mr Ford's submission that, in the regulation 14 formula, "the period of leave to which the worker is entitled under regulation 13" will always be four weeks, except in "first leave year" cases. I consider it probable that, if that had been the legislative intention, the formula would have been expressed by reference to "four weeks", with a specific provision to deal with the "first leave year" cases. Accordingly, after some hesitation, I would allow the appeals of the Inland Revenue in the cases of Mr Ainsworth, Mrs Kilic, Mrs Stringer and Mr Thwaites.

List Design Group Ltd v. Douglas

21. By regulation 30 of the Working Time Regulations a worker may complain to an Employment Tribunal that his employer has failed to pay him the whole or any part of any amount due to him under regulations 14(2) or 16(1). He must do so before the end of the period of three months beginning with the date on which it is alleged that the exercise of the right should have been permitted to begin or the payment should have been made, subject to the power of the Tribunal to extend time for such further period as it considers reasonable where it is satisfied that it was not reasonably practicable for the complaint to have been presented within the three months period (regulation 30(2)). In List Design Group Ltd v. Douglas the applicant employees complained to the Tribunal of non-payment of holiday pay, not pursuant to regulation 30 of the Working Time Regulations but by reference to Part II of the Employment Rights Act 1996. Section 23(1) of that Act enables a worker to present a complaint to an Employment Tribunal that his employer has made a deduction from his wages in contravention of section 13 (which prohibits unauthorised deductions from wages). Once again there is an extendable three month limitation period to similar effect as that under regulation 30 of the Working Time Regulations (section 23(2) and (4)). However, the situation is complicated by section 23(3) which provides:

"where a complaint is brought under this section in respect of -

(a) a series of deductions or payments……

the references in subsection (2) to the deduction in payment are to the last deduction or payment in the series…"

There is no "series" exception in the Working Time Regulations. The applicants in List Design complained of unauthorised deductions in the form of non-payment of holiday pay over a two year period, bringing their applications within three months of the final non-payment and relying on section 23(3). By section 27(1)(a), "wages" means any sums payable to a worker in connection with his employment, including

"any fee, bonus, commission, holiday pay or other emolument, whether payable under his contract or otherwise".

The case for the employees was that the withheld holiday pay was holiday pay which was payable "otherwise", that is under the Working Time Regulations. This analysis found favour in the Employment Tribunal and the Employment Appeal Tribunal (Bell J, Ms N. Amin and Mrs J.M Mathias). The relevant part of the judgment states (paras 34-35):

"….although the Regulations were passed into law after the provisions of the 1996 Act and specifically relate to holiday pay, the material provisions of the Act of Parliament, a major Act of Parliament at that, equally specifically relate to holiday pay by the application of section 27(1)(a) to Part II, including section 13(1). We do not consider that….the material, express provisions of the Act can be 'implicitly' swept away….even if only in limited circumstances limited to holiday pay, by a provision of the Regulations which contradicts the provision of the Act in certain circumstances.

That, in our view, is a burden which the 1998 Regulations are not designed to bear. Had they been so designed we would have expected some provision in an amending Act or at the very least in the Regulations……"

This reasoning was followed by the Employment Appeal Tribunal (Judge Peter Clark, Mr R. Lloyd and Mr. M Worthington) in Canada Life Ltd v. Gray [2004] ICR 673.

22. In four of the present appeals, the employers succeeded in claims brought under regulation 30, so the List Design point did not arise. However, Mr Ainsworth succeeded in respect of a claim brought under Part II of the 1996 Act and this provides Mr Underhill with the opportunity to challenge List Design in this Court. Essentially, he advances the submissions which were rejected by the Employment Appeal Tribunal in List Design. He does so with permission granted by the Employment Appeal Tribunal in Mr Ainsworth's case. Mr Ford seeks to discourage us from dealing with the point on the basis that the deduction in relation to which Mr Ainsworth succeeded before the Employment Tribunal could equally well have been processed under the Working Time Regulations without falling foul of the limitation period. He submits that the point is therefore purely academic in the context of the present appeal. We made it clear at the hearing that we do not accept Mr Ford's submission. List Design was a decision with quite far – reaching implications. It underlay the basis upon which Mr. Ainsworth in fact succeeded. It is wholly appropriate that we address the point on this appeal, as the President of the Employment Appeal Tribunal was anxious that we should.
23. So far as the point of construction is concerned, the submission of Mr Underhill is a simple one. It is that the Working Time Regulations were plainly intended to provide a single and exclusive regime for the enforcement of the new statutory rights. It cannot have been intended that the regime under regulation 30 should be capable of being circumvented. The provisions of the 1996 Act (which are derived from the provisions of the Wages Act 1986) were enacted at a time when the Directive-driven rights introduced by the Working Time Regulations did not exist.
24. In my judgment, Mr Underhill is correct to emphasise the legislative chronology. I do not consider that, in 1996, Parliament can have intended to refer to a subsequently created statutory right which comes with its own enforcement regime. If there were any doubt about this it is dispelled by section 205(2) of the 1996 Act which provides that the remedy in respect of any contravention of section 13

"is by way of a complaint under section 23 and not otherwise".

If List Design were correct, it would not be possible for a claim of statutory holiday pay to be pursued under regulation 30 which expressly provides for such a claim. Parliament cannot have so intended. I am driven to the conclusion that List Design and Canada Life were wrongly decided and that the appeal of the Inland Revenue succeeds on this issue.

Conclusion

25. It follows from what I have said that, in my judgment, the decisions of the Employment Appeal Tribunal in Kigass and List Design were not correct. 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.

Lord Justice Laws:

26. I agree and do not wish to add anything.

Lord Justice Kennedy

27. I also agree.

ORDER: Appeals allowed. Permission to appeal to be dealt with on paper. An agreed order as to costs to be submitted by close of business on Tuesday 26 April

(Order does not form part of approved Judgment)