The Court of Justice of the European Union (CJEU) has handed down a decision that has significant repercussions for gig economy employers and indeed, anyone else engaging ‘workers’ (even if not labelled as such) who do not take paid holidays.
In the case of King v The Sash Window Workshop Ltd, the CJEU, following the line taken by the Advocate General (AG) earlier this year, has ruled that a worker claiming holiday pay (emanating from the European Working Time Directive (WTD)) is not precluded from doing so simply because he has never sought to exercise a right to take such leave. Further, there should be no time bar on the amount of such leave he can claim.
Mr King was engaged on the basis he was a self-employed consultant: he had never requested paid holiday
Mr King was engaged by The Sash Windows Workshop Ltd (Sash Windows) on the basis that he was a ‘self-employed consultant’. As such, he was paid only commission. Over the 13 years he was engaged, he took varying amounts of unpaid holiday each year. As a consultant, he was not entitled to statutory holiday pay under the Working Time Regulations (WTR), and which implement the WTD in the UK. In 2008, he rejected an opportunity to instead carry on his engagement under an employment contract. When his engagement with Sash Windows came to an end in 2012, he sought compensation for holiday pay and pay in lieu of accrued but untaken annual leave for his entire engagement with Sash Windows, on the basis he had actually been a worker. The Employment Tribunal (ET) determined that both parties had genuinely mistaken Mr King’s status – he was a worker not a self-employed consultant and, therefore, he was entitled to payment for statutory holiday under the WTR during his engagement.
‘An employer that does not allow a worker to exercise his right to paid annual leave must bear the consequences’
Following appeals up to the Court of Appeal (CA), Mr King’s case came before the CJEU. A key question was whether Mr King could claim for untaken statutory holiday. Whilst Sash Windows had never afforded him the opportunity to take ‘paid’ statutory holiday, he had also never asked to take it. Further, if he could claim for such leave, should his claim be in some way time-limited. Case law has already established that workers who are unable to take statutory holiday due to sickness are entitled to carry this over to a subsequent leave year, but subject to a maximum carry-over of 18 months from the end of the leave year.
A worker does not have to exercise their leave rights to establish a claim for paid leave
Stressing that the right to be paid annual leave of at least four weeks is a ‘particularly important principle of EU social law’, the CJEU ruled that the WTD, and the right to an effective remedy under the Charter of Fundamental Rights of the EU, must be interpreted ‘as meaning that, in the case of a dispute between a worker and his employer as to whether the worker is entitled to paid annual leave [under the WTD], they preclude the worker having to take his leave first before establishing whether he has the right to be paid in respect of that leave’.
The CJEU found that to determine otherwise would mean a worker would be forced to take leave without pay and, indeed, a worker in a situation such as Mr King, who only challenged his employment status after he had left the business, would be unable to invoke after termination of employment a holiday pay claim, depriving them of an effective remedy.
Should any claim be time-limited, following case law on holiday and long-term sick leave?
Distinguishing the existing case law on holiday pay and sick leave, the CJEU further ruled that for workers in circumstances such as Mr King’s, there should be no restrictions preventing the carry over and, where appropriate, accumulation of holiday pay until termination. Whilst in the case of a worker on long-term sick leave, regard had to be had to the interests of the employer ‘faced with periods of absence’ and which could lead ‘to difficulties in the organisation of work’, this was not so in cases such as Mr King’s. Indeed, as the CJEU noted, the employer here ‘was able to benefit, until Mr King retired, from the fact that he did not interrupt his professional activity in its service in order to take paid annual leave’. Consequently, there should be no derogation from a worker’s basic entitlement to paid annual leave and the right to an allowance in lieu on termination. As such, the WTD must be interpreted as precluding ‘national provisions or practices that prevent a worker from carrying over and, where appropriate, accumulating until termination… paid annual leave rights not exercised in respect of several consecutive reference periods because his employer refused to remunerate that leave’.
So what does this mean?
This decision potentially leaves employers and users of nominally self-employed contractors and gig workers facing significant administrative and financial repercussions – as the CJEU expressly stated ‘an employer that does not allow a worker to exercise his right to paid annual leave must bear the consequences’. The case will now return to the CA, which will need to determine whether the WTR can be interpreted in light of the CJEU’s ruling and, if so, whether Mr King’s claim stands up on the facts. Mr King’s 13 years’ holiday claim equates to a sum in the region of £27,000. Notably, the CJEU did not adopt the same language as had been used by the AG, who had referred to the employer’s failure to provide ‘adequate facilities’ for Mr King to take holiday. Such terminology may have left open the possibility of further issues over whether or not adequate facilities are provided in a variety of scenarios. Instead, the CJEU has focused on a worker’s rights to paid annual leave and any specific derogations from those rules, such as in cases of long-term sickness.
Whilst we await the CA decision, employers should now take steps to identify any ‘at risk’ arrangements and take steps to protect against the risk of future claims. Indeed, employers should note that the CJEU deemed it ‘irrelevant’ that the employer here had considered ‘wrongly, that Mr King was not entitled to paid annual leave’ and that it is for an ’employer to seek all information regarding his obligation in that regard’. The CJEU also paid no heed to arguments that Mr King had rejected alternative arrangements offered during his engagement by his employer and which would have in fact afforded him paid holiday, stating that the ‘Court must take into consideration… the employment relationship as it existed and persisted, for whatever reason, until Mr King retired, without him having been able to exercise his right to paid annual leave’.
Employers grappling with the current uncertainty over what should be included in holiday pay, should also note the CJEU’s comments that a worker must ‘be able to benefit from the remuneration to which he is entitled under [the WTD]‘ and ‘a worker faced with circumstances liable to give rise to uncertainty during the leave period as to the remuneration owed to him’will ‘not be able to fully benefit from that leave as a period of relaxation and leisure, in accordance with [the WTD]‘. Unfortunately, the situation on what remuneration should be included in an individual’s holiday pay is still being driven by case law, with no indications yet of any immediate post-Brexit legislative reform.
Staffing companies and consultancies supplying the services of self-employed contractors will need to risk-assess the potential for significant holiday pay claims. Those locked into long term MSP and other outsourced services contracts relying on the use of self-employed resource will need to assess the knock-on effects of increased costs of supply not included in fee rates agreed with their clients. Some sectors may face a greater risk of claims than others. For example, individuals working as self-employed CIS workers have been bringing holiday pay claims for years, often encouraged to do so by unions so it is possible that this decision could re-ignite interest in this type of claim.
Following recent workplace tax changes deeming most sole traders as “deemed employees” and the government’s announcement in last week’s Budget to consult on extending IR35 to the private sector, it seems likely that, going forward, fewer contractors will opt or be permitted to work on a self-employed basis. If so, risks linked to worker/employment misclassification are likely to reduce over time but, according to this latest decision, it seems that potential holiday pay liabilities relating to legacy arrangements will continue the pose a risk. This will become a key issue in any sale due diligence and agreement.