An Advocate General (AG) opinion has been delivered to the Court of Justice of the European Union (CJEU) which may have far reaching consequences for gig economy employers, umbrella companies, staffing companies and anyone else engaging ‘workers’ (even if not labelled as such) who do not take paid holidays.

In the case of King v The Sash Window Workshop Ltd, the AG gave his opinion that a worker, misclassified as a self-employed consultant, was entitled to a payment in lieu of 13 years’ unpaid holiday pay on the termination of his working relationship. The AG’s opinion was that Mr King had been denied the opportunity to take the 4 weeks’ paid statutory holidays under the UK Working Time Regulations (WTR), derived from the European Working Time Directive (WTD).

The opinion is not binding, and we must now wait for the decision of the CJEU. However, if it follows the AG’s opinion (which is often the case), the decision will have significant financial repercussions for employers vulnerable to similar “worker” claims; and it does appear to us that the opinion is based on fairly strong legal arguments.

How will this affect staffing companies and umbrella companies?

UK staffing companies and umbrella companies may face particular problems. Frequently people working through them do not take paid holidays. Sometimes this is because they are engaged on a self-employed basis (which the worker may in due course claim was not genuine self-employment). Sometimes it is because the workers just do not claim accrued entitlement to paid holiday, with the money piling up at the umbrella/staffing company and then eventually being taken as extra profit. The AG’s opinion will, if followed by the CJEU, mean that these practices may have to end.

Umbrella companies and staffing companies, (and some end users who are involved in direct hire arrangements), may face substantial retrospective claims. And even if they don’t, these potential liabilities may affect the value of staffing companies who are going through a sale process; the due diligence process may pick these liabilities up and investors will expect the relevant exposure to be knocked off any purchase price.

Careful wording of holiday pay arrangements for temporary and umbrella workers can help to minimise the risk of holiday pay claims, as can tightening up self-employment arrangements for self-employed consultants and sole traders. Taking a close look at these arrangements should be a priority for staffing and umbrella companies.

The detail of the case

Mr King was a worker not a self-employed consultant

Mr King was engaged by The Sash Windows Workshop Ltd (Sash Windows) on the basis that he was a “self-employed consultant”. As such, he was paid only commission. Over the 13 years he was engaged, he took varying amounts of unpaid holiday each year. As a consultant he was not entitled to statutory holiday pay under the WTR. In 2008 he rejected an opportunity to instead carry on his engagement under an employment contract. When his engagement with Sash Windows came to an end in 2012, he sought compensation for holiday pay and pay in lieu of accrued but untaken annual leave for his entire engagement with Sash Windows, on the basis he had actually been a worker.

The Employment Tribunal (ET) determined that both parties had genuinely mistaken Mr King’s status – he was a worker not a self-employed consultant and, therefore, he was entitled to payment for statutory holiday under the WTR during his engagement.

But Mr King had never requested to take any statutory holiday

The ET was then left to grapple with the difficult question of whether Mr King in fact had any claim relating to untaken statutory holiday which he purportedly accrued during his engagement given that, whilst Sash Windows had never afforded him the opportunity to take “paid” statutory holiday, he had also never asked to take it.

Further, if the fact he had never requested it made no difference, should his claim be time-limited? Case law has already established that workers who are unable to take statutory holiday due to sickness are entitled to carry this over to a subsequent leave year, but subject to a maximum carry-over of 18 months from the end of the leave year.

The ET ultimately decided that Mr King should be awarded pay in lieu of accrued but untaken holiday for the whole of his 13 year engagement . Sash Windows appealed to the UK’s Court of Appeal, which ultimately referred a series of questions to the CJEU.

AG states (1) no request to take paid holiday necessary where circumstances outside worker’s control

The AG expressly stated that the WTD requires employers to provide “adequate facilities to workers” for the exercise of their right to take the minimum holiday required under the WTD. An adequate facility might take the form of specific contractual terms conferring the right to paid leave, or the establishment of a legally enforceable administration procedure through which can application be made to employers by workers for paid annual leave. Where no such facility is made available to a worker, they are entitled to rely on the WTD “to secure payment in lieu of untaken leave”.

AG states (2) no limit on carry-over

The AG further concluded that “upon termination of the employment relationship… a worker is entitled to an allowance in lieu of paid annual leave that has not been taken up until the date on which the employer made available to the worker an adequate facility for the exercise of the right to paid annual leave”. Whilst a member state may impose “temporal and other restrictions” on the exercise of that right, such restrictions must fall within certain boundaries. The AG expressly found that where an adequate facility for the exercise of the right to paid annual leave was never in fact provided, a “limit to the carry over period of 18 months following the end of the holiday year in which the leave accrued is not compatible with [the WTD]”. Accordingly, the worker’s entitlement is to the “full period of employment until termination of the employment relationship”.

We must now wait for the CJEU to provide a definitive ruling

The AG’s opinion is merely the preliminary to a ruling from the CJEU. If the CJEU decides in the affirmative, that workers can carry over leave where they are unable to take paid leave for reasons beyond the worker’s control other than sickness, this could leave employers facing significant administrative and financial repercussions. Mr King’s 13 years’ holiday claim equated to a sum in the region of £27,000. It will also lead to issues over what constitutes a reason beyond a worker’s control. Here, it was a genuine mistake regarding status made by both parties. However, there may be other scenarios which employers will need to anticipate and prepare for.

How will an affirmative decision from the CJEU affect umbrella workers and agency workers who did not realise they could claim? What about self-employed workers who, despite being told that they have no right to paid annual leave do, in fact, fall within the definition of “worker” and therefore qualify for paid annual leave? For years we have seen CIS subcontractors, encouraged by certain unions, bringing claims for holiday pay when finishing work on a project, so there is already precedent for this type of legal challenge, albeit that successful challenges have tended to settle for paid annual leave accruing in the last year of service. If followed, this decision will considerably increase the value and attractiveness of claims. The concern would be that the lure of sizeable compensation could expose anyone engaging individuals on a self-employed basis to workers’ rights claims more generally, including under the National Living Wage legislation and the Agency Workers Regulations.

For now we must wait and see, but employers, staffing companies and other engagers should start preparing now for the possibility that the AG’s opinion is followed, and the significant financial repercussions that may follow.