In King v The Sash Window Workshop Ltd the European Court of Justice (ECJ) ruled that where workers are not granted paid annual leave to which they are entitled under the EU Working Time Directive, 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 Working Time Directive, all workers are entitled to four weeks' paid annual leave, which is implemented in the United Kingdom by the Working Time Regulations 1998.

The regulations contain separate provisions for workers' entitlement to take leave (Regulation 13) and be paid for that leave (Regulation 16). The provisions on remedies also distinguish between claims where a worker has been denied the right to take leave and claims where a worker has not been paid for holiday that he or she has taken (Regulation 30).

Under the regulations, 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 before both the UK courts and the ECJ, the UK provisions in the Working Time Regulations have been challenged 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 in the calculation of holiday pay.

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

Facts

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

The Employment Tribunal found that King was a worker under the Working Time Regulations and that he was entitled to, among other things, payment in lieu of all the leave to which he had been entitled while working for SWW but had not taken.

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

The Employment Appeal Tribunal allowed SWW's appeal on this issue, holding that the tribunal had made insufficient findings of fact that King had been prevented from taking the leave by circumstances outside of his control. King appealed to the Court of Appeal, which made a reference to the ECJ in order to clarify various issues of EU law, including the following:

  • Are the Working Time Regulations consistent with the Working Time Directive and the right to an effective remedy under EU law if a worker must take leave before being able to establish whether he or 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 opinion

In June 2018 an advocate general of the ECJ gave an initial opinion to help to inform the ECJ's judgment (for further details please see "ECJ advocate general opines on adequate facility provisions"). The advocate general stated that employers must provide an "adequate facility" for workers to exercise their right to paid leave. If an employer fails to do this, its workers should not lose their right to paid holiday simply because they have not sought to take it. Instead, they should be able to carry their entitlement forward into subsequent holiday years. On termination of employment, the employer must pay in lieu a worker's untaken leave for the whole period during which no such facility existed.

ECJ decision

In accordance with this opinion, the ECJ interpreted the Working Time Directive's provisions on annual leave in 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. Workers faced with uncertainty over remuneration cannot fully benefit from the leave and are 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 United Kingdom has implemented the right to annual leave in the Working Time Regulations with separate remedies for the right to annual leave and the right to be paid for that leave. In a situation where an employer grants only unpaid leave, the worker must take leave before establishing whether he or she has the right to be paid in respect of that leave. This is not compatible with the right to an effective remedy for breach of the Working Time Directive.
  • Where a worker is prevented from taking paid annual leave on account of sickness absence, case law has limited the worker's right to carry over that leave to a period of 15 months. This is to protect employers from the risk of workers accumulating long periods of absence.
  • In contrast, in circumstances such as the present case, it was unnecessary to protect the employer's interests. This was not a situation in which SWW was faced with the difficulty of periods of absence – it could benefit from 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 King was entitled to no 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".

The ECJ concluded that, under the Working Time Directive, workers 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.

Comment

The ruling has significant implications for businesses that have wrongly classified individuals as self-employed contractors. If, in reality, such individuals have worker status, they can potentially claim years' worth of unpaid holiday pay.

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

The ECJ's judgment technically applies to the four weeks' leave guaranteed by the Working Time Directive only, and not to the additional 1.6 weeks provided in the United Kingdom by the Working Time Regulations. Even so, the past liabilities for some organisations could be substantial. For example, someone who has worked for a company for 15 years as a self-employed contractor can contend that they were a worker all along and bring a claim for 60 weeks' unpaid holiday pay.

Nonetheless, the case still has some distance to go. It will return to the Court of Appeal, where there may be arguments over whether it is possible for the Working Time Regulations to be given a purposive interpretation consistent with the ECJ judgment.

If this is the case, one point that needs clarification is whether claims similar to King's should be brought under the regulations, based on 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 Employment Appeal Tribunal decided that the former was the appropriate route; however, there seems to be no reason as to why a sum of money owed for accrued but untaken annual leave on termination should not be claimed as an unlawful deduction in such circumstances.

Where a worker has taken leave and has not been paid (or has been underpaid) for it, this amounts to a deduction from wages. In 2014 the government enacted statutory regulations – the Deduction from Wages (Limitation) Regulations 2014) – to introduce a two-year limitation on retrospective unlawful deduction claims for unpaid holiday to two years. Similarly useful for employers is the Employment Appeal Tribunal decision in Bear Scotland Ltd v Fulton ((2015) IRLR 15), which held that a three-month gap between deductions from wages broke the chain in a "series of deductions".

The ECJ judgment in King could 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.

There is also inevitably a Brexit angle to the case. Following the United Kingdom's departure from the European Union, holiday pay may be one area of employment law that the government decides to reform in order to reduce the financial impact of ECJ judgments such as this one on UK businesses.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Richard Lister at Lewis Silkin by telephone (+44 20 7074 8000?) or email (richard.lister@lewissilkin.com). The Lewis Silkin website can be accessed at www.lewissilkin.com.