The ECJ has ruled that workers who have not taken paid leave because they have been wrongly treated as self-employed contractors can obtain compensation for all accrued holiday – even if this goes back many years. 

The decision in King v Sash Windows will impose huge financial burdens on ‘gig economy’ businesses and is likely to encourage more workers to challenge their employment status.

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Background

Under the Working Time Regulations 1988 (“WTR’s”) all workers are entitled to 5.6 weeks paid leave per year (pro-rated for part-time staff).  Unless they are ill, workers must take their holiday in the holiday year in which it accrues and they cannot receive a payment in lieu of untaken statutory holiday unless their employment is being terminated.

Facts

Mr King worked as a commission based salesperson for Sash Windows for 13 years.  He was offered a contract of employment after 7 years but turned this down and continued to work on a self-employed basis until he was dismissed when he reached the age of 65.  In order to bring a claim of age discrimination, he had to argue that he was a “worker” (rather than being self-employed) and, as a result, was also entitled to paid holiday. 

Mr King had taken some holiday during his 13 years with the company, but none of this was paid.  He argued that he was entitled to receive compensation for the unpaid holiday he had taken plus a payment in lieu of all 24.5 weeks of untaken holiday that had accrued since the start of his employment.

Sash Windows agreed that if Mr King was a “worker” rather than being self-employed, he was entitled to receive a payment for accrued holiday pay in the current holiday year only, but not payments for previous years as these were time barred.

Mr King was initially successful at the Employment Tribunal but failed at the EAT. He appealed to the Court of Appeal, which decided that it could not determine the appeal without seeking clarification from the ECJ on whether paid leave can be carried over indefinitely in circumstances where a worker has not exercised his rights because his employer did not provide paid leave.  It also asked whether a worker has to take unpaid leave before they can bring a claim for non-payment.

ECJ judgment

The ECJ set out very clear principles:

1              A worker must know that he is going to be paid before he takes leave.

2              Workers have the right to be compensated for untaken and unpaid leave. 

3              A worker can carry over and accumulate such untaken leave until the end of their employment relationship and is not restricted in the same way as workers unable to take holiday due to long-term sickness.

These principles apply even if the employer wrongly believes that the worker is not entitled to paid leave.  Employers are under an obligation to correctly determine the status of their workforce and if they get it wrong they “must bear the consequences”.

The WTRs only provide workers with a remedy if they have taken leave which has not been paid either at the correct rate, or at all.  This is incompatible with the Directive.

What happens next?

The case will return to the Court of Appeal to determine if the WTRs can be interpreted to give effect to this decision and, if so, how much compensation Mr King will receive.

It will be interesting to see if Mr King is compensated for untaken holiday at the same rate as applies to the leave he did take which was unpaid.  The latter is calculated by reference to his earnings in the 12 weeks before he took the leave.  However, there are likely to be arguments put forward about how much he should be paid for his untaken leave.  When the EAT examined this issue it decided that Mr King was not out of pocket because he had worked rather than had taken holiday and to pay him for this time would amount to “double recovery.  It held that payment should be limited to an amount to compensate him for loss of enjoyment and welfare benefits rather than it being calculated on the basis of a week’s pay. 

I don’t think that is an attractive argument.  If holiday pay is not calculated in the normal way this could act as a disincentive to take leave – which must be discouraged.

Does the two year limitation on holiday pay claims or three month gap requirement limit the amount Mr King will receive?

No.  Legislation introduced after the overtime holiday pay case of Wood and others v Hertel and Fulton and Bear Scotland, EAT, limited the length of time a Claimant could go back to claim unlawful deductions to two years and imposed a requirement that there cannot be gaps of more than 3 months between underpayments.

However, Sash Windows (and other employers facing similar claims) will not be able to limit their exposure to simply that two year period for holiday which is not taken because it would not have been paid.  This is because Member States cannot impose limitations on the right to receive paid annual leave until a worker is made aware that he has that right. 

… the technical bit

The only issue in dispute by the time the case was referred to the ECJ was whether Mr King could claim compensation for holiday that he had accrued, but had not taken, during his 13 years’ service.  This claim was brought as a claim for compensation under the WTRs.  Most of the holiday pay claims have been argued on the basis that the failure to include overtime, allowances and commission payments amounts to a series of unlawful deductions under the Employment Rights Act 1996.   These claims have been limited by Bear Scotland and this has severely restricted the amount workers can recover.

It is possible that claimants will seek to use this judgment to argue that these limitations are unlawful.  A leading barrister in this field, Caspar Glyn QC has commented that savvy claimants may use this decision as a “crowbar” to argue that, in the case of underpaid holiday, the same principle applies and both the two year limit and Bear Scotland breach the Directive’s requirement of equivalence and effectiveness.  If that happens, employers will face the prospect of claims for underpayment going back years.

Does this apply to all holiday pay a worker is entitled to?

No.  In common with other ECJ decisions about holiday pay, it will only apply to the 20 days holiday in each holiday year required under the Working Time Directive and not the additional 8 days holiday provided under the WTR’s (i.e. the UK legislation) or any contractual holiday.

Implications for other businesses

Businesses engaging individuals on self-employed contracts, in circumstances where they later turn out to be “workers”, will, now face huge financial liabilities for holiday pay (and also for underpayments in respect of the National Minimum Wage, as well underpayments in respect of PAYE and NI). 

Uber have a “self-employed” workforce of over 40,000 in the UK.  Several of their drivers have already successfully claimed that they are workers rather than self-employed (a decision that Uber are appealing).  Many more drivers, and indeed other gig workers, might now be tempted to claim worker status if it opens the doors to holiday pay claims going back to the start of their engagements.  

The stakes just got higher for the gig economy.