In a decision which will have far reaching consequences for many employers, particularly those operating in the so called ‘gig economy’, the European Court of Justice (ECJ) has ruled that if an employer has not made provision for a worker to take paid holidays, their holiday entitlement will still accrue and will carry over for the entire duration of their engagement. The worker will then be entitled to receive a payment in lieu upon termination for all of the holiday they should have received during the period in which they were wrongly regarded to be self-employed.

The ECJ’s decision also casts serious doubt over both: (a) the rules introduced in 2015 which limit claims for back pay to two years; and (b) the EAT’s earlier ruling that gaps of three months or more between the non-payment of holiday pay render the worker unable to claim in respect of the earlier non-payments. According to the ECJ, these provisions are incompatible with the right to paid holiday.

Factual background

The worker, K, started working as a salesman for the Sash Window Workshop Ltd in 1999. He was paid by commission indexed to the sales that he brought in. He was not paid for leave taken and his contract was silent on the question of paid leave. In 2008, Sash Windows offered K an employee contract which he refused because he wished to remain self-employed. K worked continuously for Sash Windows until he was dismissed in October 2012. K brought claims in respect of his dismissal. The tribunal held that K was a ‘worker’ for the purposes of the Working Time Regulations 1998 and that, following termination, K was entitled to a payment in lieu of holiday that he had not taken during previous leave years, on the basis that he had been prevented from taking holiday by the fact that it was unpaid.

An appeal by Sash Windows was upheld by the EAT (on the basis that the tribunal had made insufficient findings of fact). The Court of Appeal referred preliminary questions to the ECJ. We reported the advocate general’s opinion in our previous article Holiday: carry-over and payment in lieu on termination.

ECJ decision

The key principles which can be extracted from the ECJ decision are:

  • employers must provide workers with an adequate way to enjoy their entitlement to paid holiday;
  • if the employer does not put the worker in a position where they can exercise their right to paid holiday, the untaken holiday is carried over and accumulates year-on-year;
  • the worker does not have to actually ‘take’ a period of unpaid holiday to be entitled to accrued holiday pay in this way;
  • the worker is entitled to a payment in lieu on termination of the total accrued amount of untaken holiday; and
  • EU law precludes national provisions or practices that prevent a worker in this situation from carrying-over and accumulating an entitlement to untaken holiday (all the way to termination if necessary). The two-year limit on unlawful deduction claims and the ‘three month gap in deductions’ rule (see above) are both likely to fall foul of this aspect of the ECJ’s decision.

What does this mean in practice?

The decision means that the risks associated with wrongly categorising a worker as self-employed just intensified. If an individual retrospectively establishes that they are in fact a worker, rather than self-employed, their entitlement to paid holiday will accumulate year-on-year and this will then become payable as a lump-sum upon termination. In so far as the minimum EU entitlement to four weeks’ paid annual holiday per year is concerned, the ECJ’s decision also suggests that the restrictions introduced upon unlawful deduction from wages claims cannot stand as they are incompatible with EU law and conflict with the individual’s workers right to paid holiday. As a result, the possibility of employers facing sizeable claims for unpaid holiday pay stretching back over several years has massively increased.