In this important decision, the European Court of Justice (ECJ) has decided that the enforcement of the right to paid holiday under the Working Time Regulations 1998 is incompatible with the provisions of the EU Working Time Directive.

King v The Sash Window Workshop Ltd, ECJ

Facts

Mr King worked for the Sash Window Workshop under a ‘self-employed commission-only contract’ from 1999 until his retirement in 2012. During that period, any leave he took was unpaid. On termination of the arrangement, he sought to recover payment for his full statutory entitlement to annual leave (both the leave taken and not paid, as well as leave he had not taken).

An employment tribunal held that Mr King was a ‘worker’ and therefore entitled to paid holiday under the provisions of the Working Time Regulations 1998 (WTR). It awarded Mr King pay in lieu of all annual leave accrued but not taken during previous holiday years, as well as for the periods of unpaid holiday he had taken.

The EAT allowed the company’s appeal on the grounds that Mr King had not been prevented from taking his annual leave, meaning that his entitlement to leave (and likewise, pay) expired at the end of each holiday year and could not be carried forward.

The Court of Appeal referred a number of questions to be determined by the ECJ, in order to clarify whether an entitlement to paid annual leave carried forward indefinitely in circumstances when a worker has chosen not to take leave as a result of it being unpaid.

ECJ decision

The ECJ has decided that workers must be allowed to carry over their entitlement to paid holiday under the Working Time Directive (WTD) and be compensated in full on the termination of their employment for the employer’s failure to pay holiday pay.

The right for every worker to take paid annual leave must be regarded as a particularly important principle of EU law. The ECJ considered that a worker faced with uncertainty as to how much he or she would be paid during a period of leave will not benefit fully from taking that leave, and is likely to be dissuaded from taking leave in the first place.

Under the current provisions of the WTR, a worker can only claim pay for a period of unpaid (or underpaid) leave he or she has taken, or bring a claim on the grounds that the employer has prevented him or her from taking the leave to which they are entitled. It does not allow a worker to pursue a claim on termination of employment for leave accrued in previous years but untaken. This, according to the ECJ, is incompatible with the provisions of the WTD.

The ECJ contrasted the position of workers such as Mr King with that of workers who are prevented from taking holiday due to an extended period of sickness absence. The ECJ has previously ruled that it is acceptable for national law to limit the period for the carry-forward of leave to 15 months in these circumstances. This has the effect of protecting employers from the risk of workers accumulating very lengthy periods of absence. The ECJ considered there was no such requirement to protect the employer’s interests in the circumstances of the present case, since it had failed to comply with its obligations towards the worker.

Consequences

This decision by the ECJ will have significant implications for employers, particularly in the gig economy sector where individuals are seeking to establish, with considerable success, their ‘worker’ status. It means that the Deduction from Wages (Limitation) Regulations 2014, which limit claims for back pay to two years, are likely to be found incompatible with EU law. It also means that the EAT’s decision in the Bear Scotland v Fulton holiday pay case, preventing workers from claiming back payments if there has been more than a three month gap in the series of deductions, is vulnerable to being overruled in future holiday pay cases.

The ECJ said that it was irrelevant that the employer did not believe Mr King to be entitled to paid annual leave. It is up to the employer to inform itself of its obligations; an employer who does not allow a worker to exercise his or her right to paid annual leave must bear the consequences.

The financial consequences of not paying workers their full entitlement to statutory holiday pay are now likely to become much more costly.