Furloughing and fundamental rights: The case of paid annual leave

As the Coronavirus Job Retention Scheme takes shape over the coming weeks, its interaction with a host of existing employment rights will need to be clarified as a matter of urgency. As we speak, the Twitterati of UK Employment Law have been working hard at this through threads and blogposts. A key question will be the intersection between ‘furloughing’ under the Scheme, and the right to paid annual leave.

There has already been statutory intervention to ensure that workers can ‘carry forward’ untaken leave corresponding to the EU-minimum four-week period into two subsequent leave years where it was not reasonably practicable to take leave conferred by Regulation 13 because of Coronavirus: see the Working Time (Coronavirus) Amendment Regulations 2020, SI 2020/365 (‘WTR Coronavirus Amendment Regulations’). Caspar Glyn QC and David Reade QC have been quick off the blocks with some very smart interventions on this very issue. The picture is a dynamic one. Even ACAS guidance on paid holidays and Coronavirus appears to have shifted over the last few days. In this Blogpost, we will set out our own thoughts on the right to paid annual leave for ‘furloughed’ employees.

What the law says

Before proceeding, we should not lose sight of the basic legal framework. The right to paid annual leave under the Working Time Regulations 1998 (WTR), SI 1998/1833, was originally derived from the European Working Time Directive. The Directive only lays down minimum standards, and permits domestic rules which are more favourable to workers. WTR continue to have effect post Brexit as EU-derived domestic legislation for the purpose of Section 1B of the European Union (Withdrawal) Act 2018 (EUWA 2018). By Section 5 EUWA 2018, the duty to interpret WTR so far as is possible in accordance with the Directive – usually called the Marleasing duty – continues to apply, as paragraph 104 of the Explanatory Notes states.

Once amended by the European Union (Withdrawal Agreement) Act 2020 (EUWAA 2020), Section 6(3) EUWA 2018 will provide that UK courts will interpret existing EU law in accordance with the ‘retained case law and general principles’ of the Court of Justice of the European Union (CJEU) until ‘IP completion day’ – the end of the ‘implementation period’. This means 31 December 2020: see Section 1A(6) of EUWA 2018, referring to the definition in Section 39(1) of the EUWAA 2020.

Although Section 5(4) EUWA 2018 originally excluded the EU Charter from incorporation into UK law post-Brexit on ‘exit day’, as a result of a forthcoming amendment made by Section 25(4)(a) of EUWAA 2020 this too will only happen after ‘IP completion day’ and not on the earlier date. So the Charter continues to be binding law until 31 December 2020. This is important because Article 31 of the EU Charter, which includes the right to paid annual leave in its list of fundamental social rights, has shaped the CJEU’s jurisprudence of the right to paid annual leave under the Working Time Directive. Recently, in two judgments published on the same day, Bauer and Shimizu, the CJEU Grand Chamber held that the right to paid annual leave in Article 31 had horizontal effect. For good measure, the Court also appears to have recognised the right to paid annual leave as a ‘general principle’ of EU law (as to which see Schedule 1 EUWA 2018), with Article 31 simply mirroring its pre-existing character as a ‘general principle’ of fundamental status. To this extent, then, the jurisprudence of the CJEU on fundamental rights will still be relevant to the domestic courts’ interpretation of the WTR. In addition, until IP completion day, the general principle and Article 31 will be horizontally effective.

The status of paid annual leave as a fundamental social right is a golden thread that has been woven throughout its jurisprudential life in the CJEU. Even as our legal relationship with the EU enters a new phase, this jurisprudential background will continue to shape any assessment of its legal position in our current crisis. Admittedly, courts and governments across Europe are now navigating some uncharted legal waters. We contend that the jurisprudence of the CJEU provides a useful map for the difficult way ahead.

Annual leave during the Coronavirus crisis

In this blogpost, we will address two practical issues which have generated a lot of Twitter activity. First, can employees be required by employers to take their annual leave during a period of ‘furloughing’? To anticipate our argument on both EU law and domestic law, we think most cannot. While a worker has the right to take paid annual leave during a period of furloughing, they cannot be forced to do so because they will be unable to enjoy a period of relaxation and leisure in the current circumstances. The alternative approach would also undermine the purpose of the WTR Coronavirus Amendment Regulations.

Second, what is the level of pay in respect of any annual leave taken during furlough? Here, both EU law and domestic law chime together: pay must be at the rate of ‘normal remuneration’ which means pay earned while actually working normally, and not while on ‘furlough’. We won’t consider the vexed question of whether pay is reimbursed in respect of workers on paid annual leave under the Scheme (although if it is not reimbursed, this may deter employers from designating periods of furlough as annual leave).

According to the ACAS Guidance (which does not have statutory force), it is permissible for a worker to request and take a period of annual leave during furloughing. It further observes that ‘Employers have the right to tell employees and workers when to take holiday’ and an employer could insist that an employee takes pre-booked holiday. The Guidance also refers, however, to the intriguing provision in the 2020 Regulations that annual leave can be carried forward into two subsequent leave years where ‘it was not reasonably practicable for a worker to take some or all of the leave to which the worker was entitled under this regulation as a result of the effects of coronavirus (including on the worker, the employer or the wider economy or society)’, adding as an example where the employee has been furloughed. There is no indication whether this provision modifies ACAS’s general view of the legal position under WTR, that it is the employer’s right to designate leave periods. The Guidance thus steers away from the most difficult question of all, can a worker refuse to take annual leave during a furlough period when directed to do so by her employer?

The purpose of annual leave under EU law

The mantra of the CJEU is that Article 7 of the Directive serves two purposes – it is to enable a worker both to rest from work and to enjoy a period of rest and leisure: see, among many other cases, the Grand Chamber in Stringer at paragraph 25. The existing case-law of the CJEU provides some clarification of the application of this principle, though it has mostly elided the two justifications. Thus, for example, workers who are absent on sick leave cannot benefit from paid annual leave because the purpose of sick leave is to enable them to recover from illness, not to enjoy rest and leisure. While, following Stringer, workers on sick leave may be permitted to take annual leave as a matter of EU law, it would be inconsistent with the underlying principle if an employer could force them to take such leave while sick. A similar principle applies to maternity leave following Merino-Gómez, which prohibits any overlap of maternity leave and annual leave given their different purposes under EU law. Conversely, following Heimann, it seems clear a worker who is not required to work at all is, under normal circumstances, ‘free to rest or to devote himself to recreational or leisure activities’ (paragraph 29). But how is the boundary drawn in other circumstances, such as furloughing during the Coronavirus outbreak?

The best explanation to date is provided in Dicu, concerning parental leave and paid annual leave, on which see this post by Rebecca Zahn. After citing the twin purposes of annual leave, the CJEU noted that incapacity for work owing to sick leave is (i) not foreseeable and (ii) beyond the worker’s control (paragraph 32). By contrast, in Dicu parental leave was not unforeseeable (and hence more amenable to the planning of time), and more a reflection of the parent’s wish to take care of his or her child. Nor was such a worker ‘subject to physical or psychological constraints caused by illness’ (paragraph 35) during the period of leave, when the wage-work bargain was suspended. These factors meant that, contrary to the position in relation to sick leave, national law could reduce annual leave as a function of the time on parental leave. Parental leave therefore fell on the Heimann side of the line.

The CJEU in Dicu also supported its interpretation of sick leave using relevant ILO material, in particular ILO Convention 132 on Holidays with Pay (Revised) 1970. This Convention has been influential in the development of the European approach, for example in relation to the principle of ‘normal remuneration’ espoused in Williams and which may be traced back to the Convention. Article 5 of ILO Convention 132 (on minimum period of service for entitlement) provides that ‘absence from work for such reasons beyond the control of the employed person concerned as illness, injury or maternity shall be counted as part of the period of service.’ While we are not here talking about a qualifying period of service for entitlement, which would constitute an unlawful precondition after BECTU, the ILO Convention identifies reasons ‘beyond the control of the employed person’ as warranting special protective treatment under Article 5.

Although the CJEU case-law is not entirely clear, we think the better argument is that ‘furloughing’ for most workers in circumstances of the current lockdown is closer to sick leave, following the orthodox line in cases like Stringer, than it is to zero-hours working or taking parental leave. First, ‘furlough’ leave is not foreseeable and it is entirely beyond the control of the employee. The decision to furlough is the employer’s, not the employee’s, and the current situation as regards employment and economic activity could scarcely have been predicted a matter of weeks ago. While that cannot provide the complete answer, more important may be a second factor. ‘Furlough’ leave in the current circumstances, like sick leave, is subject to extensive physical and psychological constraints. For now, people are only permitted to leave their homes for short periods and for a narrow range of legitimate reasons where it is necessary to do so. They may be caring for and educating children given the closure of schools and nurseries. Many people are experiencing significant levels of anxiety and depression in circumstances of the most profound economic, social and political uncertainty. In this way, the physical and psychological constraints during furlough may in fact be more intense than in many periods of sick leave. This feature of the current period has generated a veritable renaissance in comedy memes that will keep collators and cataloguers of popular culture busy for decades.

Further support for our approach comes from Article 10 (2) of ILO Convention 132, which provides that ‘In fixing the time at which the holiday is to be taken, work requirements and the opportunities for rest and relaxation available to the employed person shall be taken into account’. In a situation of effective lockdown during the current period, it cannot be said that many furloughed workers have ‘opportunities for rest and relaxation available’ to them.

While the question of whether a worker could benefit from rest and relaxation will be fact-specific and depend on their individual circumstances, it seems the vast majority of workers will not be able to do so. The most extreme cases would be those where workers cannot leave the house owing to e.g. health risks. If that is right, to force workers in general to take annual leave during ‘furlough’ would be to contradict the fundamental purpose of Article 7. ‘Furlough’ leave, in the current circumstances, means that the overwhelming majority workers are unable to enjoy a ‘a period of relaxation and leisure’ and therefore benefit from annual leave.

Revisiting the domestic cases

As the ACAS guidance makes clear, Regulation 15 WTR appears to give the employer the unfettered right to designate a time period as annual leave, subject to requirements of notice and timing. This gives the employer a kind of sovereignty over the boundary between working time and annual leave. The domestic cases have tended to support this approach, but their context is important. In Craig v Transocean International Resources Ltd, offshore workers in the oil industry worked on an alternating pattern of (usually) two weeks’ offshore work followed by two weeks’ onshore field break. The employer stipulated that annual leave was to be exercised during a period that would otherwise be an onshore field break. The workers argued that annual leave would only be meaningful where it could be exercised during a period that would otherwise be offshore work since only then would they be securing a release from an obligation to be available for work and so only then would they be achieving actual rest from their labours. The courts rejected the workers’ legal argument. Provided that the employer had given a valid notice to workers in accordance with Regulation 15 of WTR, that notice was legally effective in determining when leave could (and could not) be taken. Similarly, in Sumsion v BBC (Scotland) the worker’s six-month contract stipulated that annual leave entitlement was to be exercised on alternate Saturdays for the duration of the contract. Once again, the EAT considered that this was in accordance with Regulation 15.

Sumsion was decided before the CJEU judgment in Stringer and so did not consider the fundamental purpose of annual leave. Its compatibility with Article 7 was doubted by Lord Hope in Transocean (see paragraph 41). It is important to see the fundamental premise of Transocean. The Supreme Court accepted that the purpose of annual leave was that referred to in Stringer (see Lord Hope at paragraph 36). That principle was not threatened in Transocean by the employer insisting the workers took leave during the time when they were onshore. Premiership footballers must take their annual leave outside of the football season; teachers must take their holidays outside term time. Workers in these situations nevertheless all enjoy the positive freedom to enjoy a period of relaxation and leisure. That is to say, they are in exactly the same position as any worker on an ordinary holiday.

The point we have raised here about the constraints during furloughing simply did not arise in Transocean. Workers on furlough leave do not have the same opportunities for rest and leisure as workers taking an ordinary holiday. Neither Sumsion nor Transocean stands in the way of this argument.

No doubt WTR can be interpreted to achieve the result we have suggested, just as the domestic courts had no difficulty in permitting sick workers to take annual leave during sick leave if they wished or to carry over that leave if they were  unwilling or unable to take it (see Leeds NHS Trust v Larner). The EAT has already suggested that the discretion in Regulation 15 WTR to refuse leave could be constrained by principles of reasonableness: see Lyons v Mitie, paragraph 34. The same can apply to the discretion to issue a Regulation 15 notice. But, in any event, the horizontal effect of the Charter or the general principle would provide a trump card.

Domestic construction

A second argument is one based purely on domestic statutory construction. The recent WTR Coronavirus Amendment Regulations, providing for an extended carry-over of untaken leave, implicitly acknowledge that the effect of Coronavirus will often in fact prevent workers being able properly to benefit from the right to annual leave. This emerges from the wide meaning of effects which are relevant to whether it was not ‘reasonably practicable’ for a worker to exercise her full entitlement during the pandemic. No doubt many (all?) workers would be entitled not to take annual leave and to carry it forward because, owing to the constraints of the current lock-in, it was not reasonably practicable to take annual leave in the current leave year. The ACAS Guidance provides support for this view. It would defeat the purpose of Regulation 13(10) if an employer could, in the same circumstances, nonetheless achieve the same result by insisting that worker takes annual leave. On this view, it would be open to a worker to reject an employer notice under Regulation 15 where she takes the view that it would not be ‘reasonably practicable’ to exercise her annual leave during the furlough period. This would allow her to take a period of annual leave at a different time if she preferred to do so.

We suggest that this concept should (at a minimum) be read into Regulation 15 by holding that it would be unreasonable in light of the amendment Regulations to insist a worker takes leave while ‘furloughed’. Such an interpretive approach is supported by the status of the right to paid annual leave as a fundamental social right of particular importance.

Future arguments

An unresolved issue under Article 7 (and Article 31(2)) is whether the worker has a right to designate a period of time as annual leave, with this designation only being overridden where there are legitimate business reasons (for example, preventing school teachers from taking annual leave during term time) or social policy reasons such as a need to align periods of annual leave with the wider tempo of community life (for example, ensuring that the taking of leave is coordinated within a particular locale so that rest time may become time shared with other citizens in the local community). At a basic level, since it is the worker’s fundamental social right to paid annual leave, it would seem appropriate for the timing of leave to be determined — at least absent countervailing considerations — by the worker herself.

Article 10 of ILO Convention 132 provides that the timing of leave ‘be determined by the employer after consultation with the employed person concerned or his representative’. In our view, the scheme of the Directive and Article 31 of the Charter supports a more worker-centred approach. Specifically, this is based on the humanisation principle set out in Article 13 of the Working Time Directive (‘the general principle of adapting work to the worker’). Accordingly, we would contend that a worker has the right to designate the timing of her leave under Article 31(2) (and thus Article 7 of the Directive), subject only to overriding legitimate business or social policy reasons justifying a requirement that the leave be taken at another time. This approach shifts the default of decision-making power, compared even to the model in ILO Convention 132. It departs strongly from the model of unfettered employer sovereignty in Regulation 15. But this argument is, perhaps, for another day.

The Level of Pay

The correct level of pay in respect of annual leave can be dealt with shortly. As a matter of EU law, even where workers are on short-time working, their pay must correspond to normal remuneration based on periods of actual work: see Hein at paragraphs 36-37. It must not be based on or take account of periods of non-working. The effect of the statutory formula in Sections 221-224 of the Employment Rights Act 1996 is usually to achieve this result, because it is based on what is payable under the contract for working normal working hours, and weeks when no work was done are ignored (see Secetion 223(1)). Even Section 224, which applies where an employee has no normal working hours, should presumably focus on remuneration payable under the contract (and not, for example, a lower sum in fact paid). It too ignores weeks where no remuneration was payable (Section 224(3)), probably meaning that if the worker was given no work, any sums in fact paid are irrelevant. But in any case the domestic law must give way to the EU concept, either by horizontal effect of the Charter or by interpreting the statutory scheme to ensure compatibility with the Directive (as Court of Appeal did in Lock v British Gas). This would ensure that payment during leave corresponds to the worker’s ‘normal remuneration’ based on periods of actual work, which has the status of a fundamental principle under the Directive and the Charter.

This article was originally published on the UK Labour Law Blog