In the latest blow for “gig economy” companies, the European Court of Justice (“ECJ”), has decided that where someone who was wrongly considered to be self-employed is found to have been a 'worker', and did not take holiday leave because they believed they would not be paid for it, they must be allowed to carry it over into the next holiday year and, where appropriate, accumulate that holiday until their employment terminates. This could lead to significant claims against employers for unpaid holiday pay.

From 1999 to 2012, Mr King was a self-employed salesman who sold installations of windows and doors. He was paid commission based on his sales and did not receive any salary. His contract did not mention paid holiday and any holiday that he took, was unpaid. Sash Windows offered to employ Mr King, but he chose to remain self-employed. Mr King’s contract was terminated on his 65th birthday and he brought claims for age discrimination and holiday pay, arguing that he had in fact been a worker.

Under the European Working Time Directive, workers are entitled to take four weeks of paid annual leave and employers must also provide an adequate opportunity for workers to actually take that leave. Also, pay in lieu of annual leave may only be made on termination. Importantly, under the UK Working Time rules, leave may only be taken in the year in respect of which it is due. It cannot be carried over.

Mr King had already succeeded before the Employment Tribunal which ruled that he should be paid for three types of holiday:

  • Holiday Pay 1 – accrued but untaken holiday from his final year of work (2012/2013)
  • Holiday Pay 2 - the holiday that he actually took during the time he worked for Sash Windows, but which he was not paid for (£17,402)
  • Holiday Pay 3 - the holiday that he was entitled to take whilst working for Sash Windows, even though he did not in fact take it (£9,336.73)

Sash Windows appealed, arguing that Mr King should not be paid for leave that he did not even try to take (Holiday Pay 3). Although Sash Windows succeeded with this argument before the Employment Appeal Tribunal, the case then went to the Court of Appeal which in turn referred the matter to the ECJ.

The ECJ decided that in a case where there is a dispute between a worker and their employer about whether they are entitled to paid holiday, there cannot be a requirement on the worker to first take the holiday (without pay) and then bring a claim for holiday pay.

Where a worker does not take a holiday because they will not be paid holiday pay for it, they must be allowed to carry over that holiday entitlement into the next holiday year and where appropriate, accumulate that holiday until their employment terminates.

The ECJ drew a distinction between Mr King's situation and that of a worker on long-term sick leave, where Member States are permitted to limit the length of time that workers can carry forward their accrued holiday when they are unable to take it because of their sickness absence. The reason for the exception in the case of long-term sickness is because the ECJ acknowledged the difficulties that employers may face organising work where a worker has accumulated large amounts of holiday leave during long periods of sickness absence. However, this reasoning doesn't apply in respect of Mr King's circumstances i.e. where the worker had not taken holiday because they wrongly believed they were self-employed and not entitled to holiday. The ECJ said that the assessment of Mr King's rights to paid annual leave is not connected to a situation in which his employer was faced with periods of absence which could have led to difficulties in the organisation of work. On the contrary, the employer had benefitted from Mr King not taking his leave. It follows that an employer who does not allow a worker to take annual leave must bear the consequences. It was irrelevant that Sash Windows did not know that Mr King was a worker, and wrongly thought he was self-employed.

The case will now go back to the UK Court which will hopefully provide more clarity on the extent of employers' obligations in relation to holiday pay in cases such as this, and assess what Mr King's losses are, and what compensation he is entitled to receive, in circumstances whereby he continued to work and be paid instead of taking holiday.

What this decision means for employers

This case is significant for gig economy companies and all employers who find that those they thought of as self-employed are in fact workers, as they may potentially be faced with claims for unpaid holiday that could stretch back for many years. The demise of Tribunal fees may also mean that there is an increase in the volume of claims in this area. Whether workers will be successful is another question since there are a number of uncertainties which arise out of this decision. Some of these issues may become clearer when the case returns to the UK Courts for further consideration.

Many companies outside the gig economy could find themselves caught by these holiday pay issues. Employers should seek advice, as early as possible, on the true status of their workforce and the implications of this case. The uncertainties over holiday pay have persisted for a number of years due to the fact that the EU Working Time rules on holiday pay have been evolving over recent years through decisions of the ECJ. Consequently the UK's Working Time rules which govern holiday pay have fallen out of step, leading to confusion for UK businesses and workers. When the UK leaves the EU, the government may have the opportunity to legislate to provide more clarity in this area.