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Workers denied paid holiday can carry over rights until termination

30 November 2017

The European Court of Justice (“ECJ”) has ruled that where workers are not granted paid annual leave to which they are entitled under the EU Working Time Directive (“WTD”), they must be able to carry over and accumulate those holiday rights from year to year and be compensated for them on termination of employment

Background

Under the WTD, all workers are entitled to four weeks’ paid annual leave. This is implemented in the UK by the Working Time Regulations 1998 (“WTR”).

The WTR contain separate provisions for the entitlement of a worker to take leave (regulation 13) and the right to be paid for that leave (regulation 16). The WTR provisions on remedies also distinguish between claims where a worker has been denied the right to take leave and claims where the worker has not been paid for holiday they have taken (regulation 30).

Under the WTR, a worker’s annual leave entitlement must be taken in the leave year in which it is due and cannot be replaced by a payment in lieu except on termination of employment - regulation 13(9).

In a series of cases, in both UK courts and the ECJ, the UK provisions in the WTR have been challenged in various ways as being incompatible with the right to paid annual leave under EU law. The upshot has been to expand workers’ holiday rights in several respects. Most of the cases have focused on annual leave rights when workers are off sick and on which elements of remuneration should be included within the calculation of holiday pay.

The latest case on annual leave to be decided by the ECJ addresses a different scenario. What is the position where someone is classified as self-employed, and so not permitted to take paid annual leave by their employer, but in reality the individual has “worker” status?

Facts of the case

Mr King started working for Sash Window Workshop Ltd (“SWW”) as a salesman in June 1999. He was paid on a commission-only basis and had no contractual right to paid holiday. SWW offered Mr King an employment contract in 2008 that included a right to paid holiday, which he refused. When he was dismissed in October 2012 (on his 65th birthday), he started proceedings for unlawful deductions from his wages in respect of holiday pay.

The Employment Tribunal (“ET”) found that Mr King was a “worker” under the WTR and that he was entitled, among other things, to payment in lieu of all the leave to which he had been entitled while working for SWW but had not taken.

This ET reached this conclusion despite regulation 13(9) of the WTR (above), which states that holiday may only be taken in the leave year in which it falls due. It said that Mr King had effectively been prevented from taking the holiday, because SWW would have refused to pay it if requested. The ET relied on previous cases establishing that if a worker could not take annual leave because of sickness, it could be carried over into the next holiday year.

The Employment Appeal Tribunal (“EAT”) allowed SWW’s appeal on this issue, holding that the ET had not made sufficient findings of fact that Mr King had been prevented from taking the leave by circumstances outside his control. Mr King then appealed to the Court of Appeal (“CA”), which decided to make a reference to the ECJ in order to clarify various issues of EU law, including:

  • Are the WTR consistent with the WTD and the right to an “effective remedy” under EU law, if a worker has to take leave first before being able to establish whether he/she is entitled to be paid?
  • Can leave be carried over in these circumstances and, if so, can it be carried over indefinitely?

Advocate General’s opinion

In June 2017, as is normal, an Advocate General (“AG”) of the ECJ gave an initial opinion to help inform the ECJ’s judgment. In essence, the AG said that employers must provide an “adequate facility” for workers to exercise their right to paid leave. If an employer does not do so, its workers should not lose their right to paid holiday simply because they have not sought to take it - they should be able to carry their entitlement forward into subsequent holiday years. On termination of employment, the employer must pay in lieu of a worker’s untaken leave for the whole period during which no such facility existed.

The ECJ’s ruling

The ECJ has now issued its judgment and, like the AG’s opinion, has interpreted the WTD provisions on annual leave in a way that is very much in Mr King’s favour. The main points can be summarised as follows:

  • The right to annual leave is a particularly important principle of EU social law, enabling workers to rest and enjoy a period of relaxation and leisure. A worker faced with uncertainty over remuneration is not able to fully benefit from the leave and is likely to be dissuaded from taking it. Any practice or omission of an employer that might have such a deterrent effect is incompatible with the purpose of paid annual leave.
  • The UK has implemented the right to annual leave in the WTR with separate remedies for the right to annual leave and the right to be paid for that leave (see above). In a situation where the employer grants only unpaid leave, this has the effect that a worker has to take leave before establishing whether he/she has a right to be paid in respect of that leave. This is not compatible with the right to an effective remedy for breach of the WTD.
  • Where a worker is prevented from taking paid annual leave on account of sickness absence, previous case law has limited the worker’s right to carry over that leave to a period of 15 months. This was in order to protect employers from the risk of workers accumulating periods of absence of too great a length.
  • In contrast, in circumstances such as the present case, it was not necessary to protect the employer’s interests. This was not a situation in which SWW was faced with the difficulty of periods of absence - it was able to benefit from Mr King not taking paid annual leave. It was down to the employer to seek information regarding its annual leave obligations and the fact that SWW considered, wrongly, that Mr King was not entitled to paid annual leave was irrelevant. In this situation, an employer that does not allow a worker to exercise the right to paid annual leave “must bear the consequences”.

Accordingly, the ECJ concluded that, under the WTD, a worker must be able to carry over and accumulate – until termination of the employment relationship – paid annual leave rights that have not been exercised in respect of several reference periods because the employer refused to remunerate that leave.

Implications

This is a powerful ruling by the ECJ which has major implications for businesses that have wrongly classified individuals as self-employed contractors. If they in reality turn out to have "worker" status, they can potentially claim unpaid holiday pay going back years.

Commentators have already been observing that this could particularly affect businesses operating in the gig economy and may provide a further incentive for people working in such business to challenge their employment status. The approach taken by the ECJ effectively places the burden on employers to ensure they have made a correct assessment as to a worker’s rights to paid holiday.

Note that the ECJ’s judgment technically only applies to the four weeks’ leave guaranteed by the WTD and not to the additional 1.6 weeks provided in the UK by the WTR. Even on that basis, though, the past liabilities for some organisations could be substantial. For example, someone who works for a company for 15 years as a self-employed contractor before leaving can contend that they were a “worker” all along and bring a claim for 60 weeks’ unpaid holiday pay.

Nonetheless, this case still has some distance to go and we should not get ahead of ourselves. It will now return to the CA, where there may be arguments over whether it is possible for the WTR provisions to be given a “purposive” interpretation consistent with the ECJ’s judgment.

If it is, one point that needs clarification is whether claims like Mr King’s should be brought under the WTR, based upon refusal to permit the worker to exercise the right to paid annual leave, or as deductions from wages claims under the Employment Rights Act 1996? The EAT decided that the former was the appropriate route, but there seems to be no reason why a sum of money owed for accrued but untaken annual leave on termination should not be claimed as an unlawful deduction in circumstances like this.

Where a worker has taken leave and not been taken paid for it – or underpaid – there is no question that this would amount to a deduction from wages. The UK Government enacted statutory regulations in 2014 to introduce a two-year limitation on retrospective unlawful deduction claims for unpaid holiday to two years – the Deduction from Wages (Limitation) Regulations 2014. Also useful for employers is an EAT decision which says that a three-month gap between deductions from wages breaks the chain in a “series of deductions” (Bear Scotland Ltd v Fulton [2015] IRLR 15).

The ECJ’s judgment in Mr King’s case could, however, potentially provide ammunition for the two-year back-pay limit under the 2014 regulations and the Bear Scotland ruling to be challenged in other cases as being incompatible with EU law.

Finally, there is inevitably a Brexit angle to this. In the longer term, following the UK’s departure from the EU, holiday pay may be one of the areas of employment law that the Government of the day decides to reform in order to reduce the financial impact of ECJ judgments such as this one on UK businesses.

King v The Sash Window Workshop LtdECJ judgment available here

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