Introduction

Under the EU Working Time Directive, all workers are entitled to four weeks' paid annual leave. This deceptively simple principle has generated a multitude of cases, perplexing employers and infuriating Eurosceptics by expanding workers' holiday rights in unforeseen ways. The majority of cases have focused on the right to paid holiday when off sick and on which elements of remuneration holiday pay should include.

The recent advocate general opinion in King v The Sash Window Workshop Ltd, if followed by the European Court of Justice (ECJ), will extend employers' liabilities in a new direction by requiring that they must provide an "adequate facility" for workers to exercise their right to paid leave. If an employer does not provide such facility, their workers will not lose their right to paid holiday simply because they have not sought to take it; they will be able to carry their entitlement forward into subsequent holiday years. On termination of employment, the employer will have to pay in lieu of a worker's untaken leave for the entire period when no such facility existed.

Often, an individual qualifies as a 'worker' even though both employer and worker mistakenly believe the individual to be genuinely self-employed and so not entitled to paid holiday. The advocate general's opinion seems to place the burden for such mistakes firmly on the employer.

Facts

Mr King started working for The Sash Window Workshop on June 1 1999. He was a salesman paid on a commission-only basis and had no contractual right to paid holiday. The Sash Window Workshop offered King a contract of employment that included a right to paid holiday in 2008, which he refused. King was dismissed on October 6 2012 (his 65th birthday). He started proceedings for holiday pay, among other claims.

The Employment Tribunal found that King was a worker under the Working Time Regulations 1998. This aspect of its decision was not subsequently appealed. The tribunal went on to find that King was entitled to the following holiday pay (as a series of unlawful deductions from wages):

  • Holiday pay one for leave accrued but untaken during his final leave year.
  • Holiday pay two for unpaid leave he had taken while working for The Sash Window Workshop.
  • Holiday pay three for all leave to which he had been entitled while working for The Sash Window Workshop but had not taken.

The finding on holiday pay three was not on its face consistent with Regulation 13(9) of the Working Time Regulations, which states that holiday may be taken only in the leave year in which it falls due. The tribunal reached its decision on the basis that King had been prevented from taking the holiday because The Sash Window Workshop would have refused to pay it if requested. The tribunal relied on NHS Leeds v Larner (2012 IRLR 825), in which the Court of Appeal ruled that if a worker could not take annual leave in the correct year because of sickness, it could be carried over into the next holiday year.

The Sash Window Workshop appealed this part of the decision to the Employment Appeal Tribunal (EAT), arguing that if King was not prevented from taking the leave by circumstances beyond his control, the principle in Larner should not apply. The EAT allowed the appeal, saying that the Employment Tribunal had not made sufficient findings of fact that King had been prevented from taking holiday.

The EAT also criticised the Employment Tribunal for allowing the claim for holiday pay three as a series of "unlawful deductions from wages". As King was paid his wages for the periods he would otherwise have taken as holiday, the EAT said that what he had lost was the health and welfare benefits of taking holiday. Where the complaint is that a worker was not allowed to exercise the right to holiday, the award is such compensation as is just and equitable (under Regulations 30(3) and (4) of the Working Time Regulations). The EAT considered this was damages rather than wages, so could not be claimed via an unlawful deduction claim under the Employment Rights Act 1996. A worker could not therefore rely on the argument that there was a "series of deductions" to try to extend the time limit for bringing a claim, which under the Working Time Regulations should be brought within three months of the act being complained of. King appealed.

The Court of Appeal identified various issues of EU law that needed clarification:

  • It questioned whether Regulation 13 of the Working Time Regulations was consistent with the Working Time Directive and the right under EU law to an effective remedy given that, if the EAT was correct, a worker would have to take leave and would only afterwards be able to test whether he or she must be paid.
  • It sought clarification as to the circumstances in which leave could be carried over and whether it could be carried over indefinitely.

Court of Appeal's questions

The specific questions referred by the Court of Appeal to the ECJ were as follows:

"(1) If there is a dispute between a worker and employer as to whether the worker is entitled to annual leave with pay pursuant to [the Working Time Directive], is it compatible with EU law, and in particular the principle of effective remedy, if the worker has to take leave first before being able to establish whether he is entitled to be paid?

(2) If the worker does not take all or some of the annual leave to which he is entitled in the leave year when any right should be exercised, in circumstances where he would have done so but for the fact that the employer refuses to pay him for any period of leave he takes, can the worker claim that he is prevented from exercising his right to paid leave such that the right carries over until he has the opportunity to exercise it?

(3) If the right carries over, does it do so indefinitely or is there a limited period for exercising the carried-over right by analogy with the limitations imposed where the worker is unable to exercise the right to leave in the relevant leave year because of sickness?

(4) If there is no statutory or contractual provision specifying a carry-over period, is the court obliged to impose a limit to the carry-over period in order to ensure that the application of the [Working Time Regulations] does not distort the purpose behind [the Working Time Directive]?

(5) If so, is a period of 18 months following the end of the holiday year in which the leave accrued compatible with the [Working Time Directive] right?"

Advocate general's opinion

The advocate general considered that the pre-existing case law on exercising the right to paid annual leave was not relevant to the issues raised in King's case because all of those cases concerned the conditions a member state could impose on exercising the right to annual leave (eg, periods of carry over). However, in this case, the essence of the right was in issue as there was no facility within the employment relationship for the exercise of the right in the first place.

The advocate general concluded that "employers are bound to provide adequate facilities to workers for the exercise of the right". Provision of an adequate facility might be specific contractual terms conferring the right to paid leave or the establishment of a legally enforceable administrative procedure through which an application could be made to employers by workers. Only once the facility has been provided can any restrictions on the exercise of the right to leave begin to apply.

Turning to the five questions referred to the ECJ, the advocate general opined as follows:

  • The answer to question one was that it was incompatible with EU law to require a worker to take leave before knowing whether he or she would be paid for it. Such a position would require the worker to take steps to secure the creation of the facility, when it should be the employer's obligation.
  • The answer to question two was that if the worker does not take annual leave because the employer refuses to pay for it, he or she can claim that they were prevented from exercising the right to paid leave such that the right carries over until he or she has the opportunity to exercise it.
  • The answers to questions three to five were that the worker is entitled to an allowance in lieu of untaken paid leave up until the date that the employer made an adequate facility available. It is only once the facility has been provided that any restrictions on the exercise of the right could start to apply.

In King's case, the advocate general said that the offer of employment in 2008 which included a right to paid holiday might have been an "adequate facility" for the exercise of the right to paid leave. It would be up to the Court of Appeal to decide this issue. If so, any restrictions on the exercise of the right to paid annual leave imposed under the Working Time Regulations that were compatible with EU law (eg, carry-over periods) could commence from this point. If not, King would be entitled to an allowance in lieu of paid holiday for the whole of his relationship with The Sash Window Workshop.

Implications

It remains to be seen whether the ECJ's judgment will follow the advocate general's opinion. If it does, this will place the burden on employers to ensure that they have made a correct assessment as to a worker's rights to paid holiday. If the employer gets it wrong, the limitation period for bringing a claim in respect of holiday for the whole period of employment does not start to run until the termination date. Workers could potentially build up years' worth of holiday pay claims.

If the employer starts to offer paid holiday part way through the relationship, it seems the limitation period to bring claims would start from that point. As workers have no right under the Working Time Regulations to pay in lieu of holiday until termination, in this scenario the worker would have to try to exercise the right to take the accrued paid holiday. If there was too much for the worker to take in what remained of that holiday year, he or she would probably be able to carry the balance over and take it in the following holiday year.

Even if the ECJ agrees with the advocate general's approach, this case still has some way to go. It will ultimately return to the Court of Appeal, where there may be arguments over whether it is possible for the Working Time Regulations to be interpreted in this way. The position with regard to time limits and backdating of claims will still need to be finalised and clarified – in particular, whether the EAT was correct that these types of cases should be brought under the Working Time Regulations, based on the refusal to permit the worker to exercise the right to paid annual leave, rather than as deductions from wage claims under the Employment Rights Act.

Claims brought under the Working Time Regulations must be brought within three months of the date on which leave should have been permitted to begin, or within such further period as the tribunal considers reasonable where it was not reasonably practicable to bring the claim in time (Regulation 30).

Ostensibly, King would be out of time to bring such a claim. The Court of Appeal may decide that it is possible to give the Working Time Regulations a purposive construction to extend the time limit to bring a claim under Regulation 30, or it might accept that it was not "reasonably practicable" to bring the claim earlier. If it were to do so, it is not clear what compensation King could hope to recover. Would a "just and equitable" amount of compensation be the same as the holiday pay he would have been paid if he had gone on holiday, or would it be a different amount calculated according to his loss of health and welfare?

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 Bethan Carney at Lewis Silkin by telephone (+44 20 7074 8000?) or email (bethan.carney@lewissilkin.com). The Lewis Silkin website can be accessed at www.lewissilkin.com.