The Court of Justice of the European Union has ruled that a retired worker can claim holiday pay for both unpaid or untaken annual leave accrued during his 13-year tenure.
In the case, King v The Sash Window Workshop and Dollar, King worked as a window salesman on a self-employed, commission-only contract between 1999 and his retirement in 2012. On the basis of this contract, when King took annual leave, it was unpaid. After leaving the organisation, King undertook to recover payment for annual leave that he had taken and not been paid for as well as for leave that he had accrued but not used for the duration of his service. The Sash Window Workshop refused on the basis that King was self-employed and therefore not entitled to employment rights such as holiday pay and the national minimum wage.
King originally took the case to the Employment Tribunal (ET), which found under the working time directive that King was a worker rather than a self-employed contractor. The ET stated that King was entitled to holiday pay for accrued holiday that was untaken at King’s retirement in the final annual leave year of 2012-2013, for unpaid annual leave taken during his service, and for pay in lieu of accrued but untaken leave throughout the whole period of employment.
The Sash Window Workshop referred the ET’s decision to the Employment Appeal Tribunal (EAT), which allowed the appeal and remitted the claim back to the ET. King and The Sash Window Workshop appealed and cross-appealed this decision respectively, with The Sash Window Workshop arguing that King lost his entitlement to payment in lieu of untaken paid annual leave as King was not entitled to carry over periods of untaken annual leave into a new holiday year and so the resulting claim for the holiday years in question was time-barred. King on the other hand stated that payment in lieu of untaken annual leave did not arise until after the termination of the working relationship, and therefore his claim was timely.
The case was then referred to the European court in order to clarify whether under European Union (EU) law the worker has to firstly take annual leave before being able to establish whether he is entitled to be paid, and if the worker does not take some or all of his entitled annual leave due to the fact that his employer does not provide paid leave, can the worker claim that he is prevented from exercising his right to paid leave and therefore the right carries over until it can be used?
It was found by the EU court that uncertainty around remuneration caused by having to take unpaid leave meant that King could not fully benefit from taking leave, deterring him from using annual leave in the first place. This would therefore be incompatible with the purpose of the right to paid annual leave under the Charter of Fundamental Rights of the European Union. In addition, because the employer only provided unpaid leave, the EU court decided that King would be forced to take unpaid leave before claiming for payment.
Europe’s highest court concluded that in the absence of any national statutory provision establishing a limit to the carry over of leave in accordance with the requirements of EU law, allowing entitled paid annual leave to be extinguished, would validate conduct that goes against the purpose of the working time directive, which enables paid annual leave in order to maintain worker health.
J L da Cruz Vilaca, president of the chamber, said: “A worker who has not been able, for reasons beyond his control, to exercise his right to paid annual leave before termination of the employment relationship is entitled to an allowance in lieu under article 7(2) of Directive 2003/88. The amount of that payment must be calculated so that the worker is put in a position comparable to that he would have been in had he exercised that right during his employment relationship.
“Unlike in a situation of accumulation of entitlement to paid annual leave by a worker who was unfit for work due to sickness, an employer that does not allow a worker to exercise his right to paid annual leave must bear the consequences.”
James Potts, head of legal at Peninsula, added: “The case was brought by Peninsula as we wanted to seek a decision in this case as it was an untested, grey area. We didn’t want other small employers to be in the same situation as our client where they are facing the risk of having to pay many years of back pay because the law is unclear. The significance of the impact of the judgment was recognised by the UK government, who supported our attempt to clarify the law.
“Following the confusion regarding holiday pay calculations, this is the next big holiday issue for employers to grapple with. This decision will have a significant impact on cases where the status of the individual is disputed. Where it is decided, a number of years down the line, that a self-employed individual was actually a worker the employer will face significant financial liability. They will have to compensate for taken but unpaid holiday during the relationship and will also have to pay for accrued holiday that wasn’t taken throughout their engagement.
“Employers with self-employed individuals, whether these number in single figures or the thousands, need to seek advice on the real status of their workforce. Although contractual documents may be drafted to create a self-employed relationship, a tribunal can look behind this to examine what actually happens in practice. Once a decision is made that the individual is actually a worker or an employee, liability for significant holiday back pay will arise.
“In acknowledgement of the significant impact holiday pay claims can have, since July 2015 the government has limited back pay liability for new claims to two years. This reduces the financial impact of the decision for small employers but does not remove the risk of being taken to a tribunal. Since the removal of fees, there is nothing stopping a self-employed individual from submitting a tribunal claim to test their status, or seek a financial settlement.
“This European decision binds UK tribunals when deciding similar cases. In its current form, the Brexit Withdrawal Bill maintains European judgments made before the UK’s exit from the EU. However, it does give the Supreme Court the right to depart from these decisions where it is right to do so. As such, this decision will remain binding post-exit unless a future case proceeds through the domestic courts to the Supreme Court, where this decision could be departed from.”
Nicola Ihnatowicz, employment partner at Trowers and Hamlins, said: “The ECJ’s decision is of particular significance to the gig economy where, on a number of different occasions, the label of self-employed contractor has been found to conceal an individual’s true status as a worker. Employers who find that those they have always regarded as self-employed contractors actually have worker status will now potentially be faced with a significant financial liability for unpaid holiday pay.
“Under the Deduction from Wages (Limitation) Regulations 2014 there is a two year backstop on claims for holiday pay. However, following the decision in Sash Window Workshop the entitlement to pay in lieu arises all at once on termination so the two-year back pay limit will have no relevance. As a result employers who have failed to provide their workers with adequate facility to take paid leave may be looking at a liability for many years of untaken holiday.
“This is an example of a decision from the ECJ that the UK courts may still be required or at least permitted to take account of during any transition period prior to Brexit.”