Worker entitled to payment in lieu of accrued leave for the whole period that the right to take paid leave was denied, potentially up to 13 years

The ECJ has ruled that workers who are denied the right to take paid annual leave are entitled to bring claims in respect of accrued but untaken leave. There is no requirement on them to take the leave on an unpaid basis in order to bring a claim. Further, the right to paid annual leave for such workers accrues and carries over without limitation. This case has important implications for employers who have not yet adjusted holiday pay to include variable payments such as overtime and commission. It is also of concern to employers who engage individuals on a self-employed basis but who could be deemed to be "workers" for employment law purposes (King v The Sash Window Workshop, ECJ).

Background law

The ECJ has previously held that sick workers continue to accrue their annual leave during a period of sick leave and are entitled to carry it over to another leave year if desired. In the case of KHS AG v Schulte the ECJ held that there could be a limitation on the carry over period, although the carry over period should be significantly longer than the leave year. In that case the ECJ held that a carry over period of 15 months was lawful. In Plumb v Duncan Print Group the EAT concluded that the Working Time Directive (WTD) does not require indefinite carry over of leave, but "at most" required carry over of 18 months.

Facts

The Claimant worked as a salesman for the Respondent for 13 years, engaged under a "self-employed commission-only contract". He was not paid a salary and nor did he receive any paid annual leave. When he did take annual leave, it was unpaid. Nine years into the engagement, the Respondent offered to engage the Claimant on an employment contract (which would have provided for paid annual leave), however, the Claimant refused and continued under the "self-employed" contract.

After the termination of his contract, the Claimant brought a Tribunal claim alleging he was a worker and claiming unpaid holiday pay, arguing that he had not taken his full entitlement of annual leave because it would have been unpaid. The Tribunal found that the Claimant was a worker and proceeded to award holiday pay in respect of both taken and untaken holiday in the previous 13 leave years.

The Respondent accepted that the Claimant was entitled to be paid in respect of leave which had been taken, and also leave which was accrued but untaken in the final leave year (2012 - 2013). However, the Respondent appealed the Tribunal's decision to award holiday pay in respect of the untaken holiday from the previous 13 leave years (1999 – 2012). The EAT overturned the Tribunal's decision on the basis that it was not clear that the Claimant had been prevented from taking annual leave due to reasons beyond his control.

The Claimant appealed. The Court of Appeal referred a number of questions to the ECJ. In a nutshell, the Court asked whether a worker can claim that an employer's failure to pay for periods of annual leave meant that they had been "prevented" from taking their leave (and, in which case, the leave should carry over). The Court also asked about the length of any such carry over: was it indefinite or would an 18-month carry over period be lawful?

Advocate General's Opinion

Ahead of the ECJ's decision, Advocate General Tanchev issued a non-binding opinion earlier this year. In summary, the opinion said that where a worker was deterred from taking annual leave because it was unpaid they could say that they have been prevented from exercising their right to paid leave. In such circumstances, the right to leave will accrue and carry over, without limitation, until the worker is permitted to exercise the right.

A limitation on carry over would only be lawful where the employer had permitted the worker to take paid annual leave. This opinion meant that the Claimant was potentially be entitled to payments in lieu of accrued but untaken annual leave for the entirety of his 13-year engagement.

ECJ decision

The ECJ agreed with the Advocate General and ruled as follows:

Does a worker have to first take the unpaid annual leave in order to make a claim for payment in respect of that leave?

A failure to pay a worker for a period of annual leave would dissuade them from taking that leave and would be incompatible with the purpose of the right to paid annual leave under the Working Time Directive i.e. to enable the worker to rest and enjoy a period of relaxation and leisure.

However, the ECJ noted that the EAT had said that a worker can only bring a claim for breach of the right to a period of annual leave (under Regulation 13 of the Working Time Regulations 1998 (WTR)) where the employer had not permitted them to take the leave. That was not the case here. The Claimant had been permitted to take annual leave, it was just that it he would not be paid for it. The alternative remedy is to bring a claim for a breach of the right to be paid for a period of annual leave (under Regulation 16 of the WTR). However, this route was only available where the leave had already been taken. The result was that a worker such as the Claimant would be forced to take the unpaid leave, in order to then bring a claim for payment.

The ECJ said this was incompatible with the WTD and workers are not required to first take the unpaid leave in order to be entitled make a claim for payment in respect of that leave.

Where annual leave is unpaid, can a worker claim that he has been prevented from exercising his right to paid leave (meaning that the right then carries over until they are given the opportunity to exercise it)?

The ECJ said that the Claimant did not exercise his right to paid annual leave for "reasons beyond his control". In other words, he was "prevented" from taking paid annual leave. It was irrelevant whether the Claimant was offered the opportunity to move to a different contractual relationship which would have provided for paid annual leave. The Court had to consider the employment relationship as it "existed and persisted".

If the leave does carry over for workers in this position, is the carry over period indefinite or limited (as it is for workers who do not take their leave due to sickness)?

In the context of sick workers absent for several consecutive holiday years, the ECJ had previously ruled that unlimited accumulation of annual leave would no longer reflect the actual purpose of paid annual leave i.e. to enable the worker to rest and enjoy a period of relaxation and leisure. Therefore, the ECJ had permitted a derogation from the right by allowing a limitation of the carry over of annual leave for sick workers (see "Background law" above - in KHS v Schulte a 15-month carry over period was held to be lawful). This limitation balanced the need to protect the worker's entitlements and the risk to the employer that a worker could accumulate a large amount of leave and the consequent difficulties in organising work around this.

The question was then whether a worker who had been prevented from taking leave because it was unpaid was comparable to a sick worker. The ECJ said no. They highlighted that the right to paid annual leave cannot be interpreted "restrictively" and any derogation must be "limited to what is strictly necessary to safeguard the interests which that derogation protects". In a case where an employer has failed to provide payment for annual leave the Court said the protection of the employer's interests was not "strictly necessary" and would not justify a derogation from a worker's entitlement to paid annual leave. Employers that do not allow their workers to exercise their right to paid annual leave must "bear the consequences". This meant that there should be no limitation on the right to accumulate and carry over paid annual leave rights for workers in this position.

At first blush, an employer who provides paid annual leave to their workforce might think this decision is of little relevance to them. However, it has very important implications for many employers in three key ways:

Workers who do not take their annual leave at all because it is underpaid

The ECJ said that failing to pay a worker for a period of annual leave would be incompatible with the purpose of the right to paid annual leave under the Working Time Directive and that such workers could carry over their annual leave entitlements without limitation.

However, they actually went further and said: "…any practice or omission of an employer that may potentially deter a worker from taking his annual leave is equally incompatible with the purpose of the right to paid annual leave". This is a potentially crucial point for employers who have not yet adjusted holiday pay to include variable payments such as overtime and commission. A worker could argue that the practice of excluding such items from holiday pay deterred them from taking their annual leave. In such circumstances, the employer could find that the worker has the right to accrue and carry over their unpaid annual leave rights without limitation until the point of termination. However, it is not clear exactly how such losses would be calculated in practice (as the worker would have continued to work and be paid).

Workers who take their annual leave despite it being unpaid or underpaid

The second issue concerns workers who elect to take their annual leave, despite it being unpaid or being underpaid (e.g. if it does not include elements of variable pay), and then bring a claim for an historic series of such non-payments or underpayments. Workers in this position would need to bring a claim for unlawful deductions from wages under s.23 of the Employment Rights Act 1996. After the Bear Scotland decision, the Deduction from Wages (Limitation) Regulations 2014 (2014 Regulations) introduced a 2-year limitation on such claims. Further, any such claims must be brought within 3 months of the last in the series of deductions and where there is a gap of more than 3 months between any two separate deductions (as there often will be between periods of holiday), the series of deductions is broken.

Although the ECJ was not asked to rule on this scenario (i.e. they were ruling on untaken leave only, rather than taken leave), in light of their comments that the right to paid annual leave cannot be interpreted "restrictively" it arguably follows that the 2-year limitation in the 2014 Regulations is incompatible with the WTD. However, even if this is the case, private sector employers should be able to rely on the 2-year limitation for the time being given the explicit nature of the restriction of the 2014 Regulations. By contrast, public sector workers should be able to rely directly on the WTD to argue that there should be no limitation on their right to claim unpaid or underpaid holiday back pay.

It also seems possible that the requirement for there to be a gap of not more than 3 months between separate deductions is incompatible with the WTD. For example:

  • A worker is paid basic holiday pay only. The employer does not include variable payments such as overtime and commission.
  • Because of this the worker limits his annual leave to 2 weeks' in July and 1 week in December each year. They do not take their remaining 2 weeks' annual leave entitlement (only 1 week of which is derived from the WTD).
  • The worker brings a claim in the following January for unlawful deductions from wages in respect of the underpaid annual leave which he has taken.
  • There would be a gap of more than 3 months between the July and December deductions, meaning that they would not be a "series" and the worker would not be able to claim for the July deduction.
  • It is possible that the worker may successfully be able to argue that the reason for the large gap was because the employer's practice of underpaying for annual leave deterred him from using his full entitlement and meant that the leave he did take was spaced throughout the year. By denying him the right to claim for the July deduction, the employer would be benefiting from their non-compliance with the WTD.

However, there is no suggestion that the 3-month limitation period within which such a claim must be brought would be at risk. Indeed, a 3-month limitation period exists for claims brought under the WTR for untaken leave (the claim brought by the Claimant) and this was not criticised by the ECJ.

Risk of claims from wrongly-classified workers

Third, the decision will also be of particular concern to employers who purport to engage people on a self-employed basis who may, in reality, have worker status and be entitled to paid annual leave. Clearly, this could be an issue for businesses operating in the "gig economy", but it could also affect mainstream businesses who engage self-employed contractors. Employers should carefully assess their contractor relationships and assess the risk of their having worker status.