The European Court of Justice (“ECJ”) has ruled that workers are entitled to be paid in lieu of any accrued but untaken holiday on termination, where they have been prevented or discouraged from taking it.

Employees and workers in the UK have a minimum EU statutory entitlement to 4 weeks’ paid holiday, which is contained in the Working Time Directive (“WTD”) and applies equally across all EU member states. The WTD has been implemented in the UK by the Working Time Regulations 1998 (“WTR”). The WTR also provides workers with a further minimum UK statutory entitlement to an additional 1.6 weeks’ paid holiday (or 8 days).

As a general rule, under the WTR, there is no right to carry over accrued but untaken holiday from one holiday year to the next – this is often known as the “use it or lose it” principle. There is an exception to this rule where a worker is unable to take accrued holiday due to sickness absence. In those circumstances, the ECJ has ruled that carry-over is permitted, although national laws can place limits on this. In the UK, case law has suggested that the maximum carry-over period is 18 months from the end of the holiday year in which the annual leave accrued.

In King v The Sash Window Workshop Ltd (“SWW”), Mr King worked for SWW as a commission only salesman for 13 years, on an apparently self-employed basis. He was never paid for any periods of holiday during that time. His contract was terminated when he reached the age of 65 and he brought a successful claim for age discrimination.

Separately, he claimed for unpaid holiday pay, on the basis that he was a “worker” rather than an independent contractor. This claim reached the ECJ, for the reasons explained below.

Holiday pay claim

Mr King argued that he had not taken his full annual leave entitlement each year, because it would have been unpaid.

The interesting point about his holiday pay claim was that he sought to recover pay in respect of leave he had accrued but not taken in previous holiday years. Mr King’s argument was that on termination, he should have been entitled to a payment in respect of untaken leave, for the entire duration of his engagement. The key question was whether he was entitled to carry it over each year, or did he lose it at the end of the relevant holiday year?

The employment tribunal held that Mr King should have been classified as a worker and therefore, he was entitled to payment in lieu of all annual leave that he had accrued. SWW successfully appealed to the Employment Appeal Tribunal, which ruled that he had not been prevented from taking it for reasons beyond his control (unlike workers who were on sickness absence).

Mr King appealed further to the Court of Appeal, which referred the matter to the ECJ.

ECJ decision

In short, the ECJ held that EU law requires that a worker knows that they will be paid for leave, before taking it. Therefore, where a worker has not exercised their right to paid holiday over several years because it was unpaid, they can continue to accumulate and carry over paid leave indefinitely, until the relationship is terminated. Under the WTR, it appeared that a worker would need to take the holiday first and then bring a claim if it was not paid. However, the ECJ considered that this did not provide an effective remedy (which is a fundamental EU right).

The ECJ made the distinction between accumulating and carrying over of annual leave during sickness (for which carry-over limits are in place) and a worker not being allowed to exercise his right to paid annual leave. In the latter case, the employer had to bear full responsibility for not allowing a worker to exercise their rights (even if it was mistakenly believed that they were not a worker).

As an aside, Mr King had been offered a contract of employment in 2008, but he chose to remain self-employed. It was deemed irrelevant that Mr King could, at some point during his engagement with SWW, have accepted a different contract providing for the right to paid annual leave.

A practical view

This ruling only applies to the minimum 4 weeks’ leave under the WTD (not the additional 8 days under the WTR or any additional contractual holiday provided by employers). However, it could potentially expose employers to paying large amounts to workers of holiday pay on termination, to individuals who have been wrongly classified as independent contractors.

This issue has been brought into sharp focus by the recent high-profile cases on employee or worker status, particularly in the context of the gig economy. Therefore, it will be increasingly important for businesses to identify an individual’s status at the outset of any engagement and ensure that it accurately reflects the reality of how the relationship will operate on a day-to-day basis.

It is also unclear at this stage whether the current “backstop” of two years will continue to apply in cases involving holiday pay. Arguably, this case only gives rise to a right to pay in lieu which crystallises on termination, in the narrow situation in which a worker is not offered paid holiday. The principles may not extend to cases in which a worker takes holiday and then brings a claim on the basis that he or she has not been paid (or has been underpaid).

The case will now return to the Court of Appeal, which will have to decide whether the WTR can be interpreted consistently with the ECJ ruling. It appears that an already complex holiday pay landscape has just become a little more complicated.