The Court of Justice of the European Union has decided today that the right to paid holiday carries over to termination where an employer has refused to pay for leave. This has hugely significant consequences for holiday pay in the UK.

What is the case about?

Mr King worked for The Sash Window Workshop Limited on the basis of a ‘self-employed commission-only contract’ from 1999 until he retired in 2012. He received no salary during that period, only commission. If he took any annual leave, it was unpaid.

On the termination of employment Mr King claimed payment for annual leave for the entire 13 year period of his engagement. The employment tribunal found that he was a ‘worker’, rather than self-employed. He was, therefore, entitled to holiday pay. The tribunal’s award included pay in lieu of annual leave accrued but not taken during previous years, claimed as a series of deductions.

When the case came before the Court of Appeal, it was noted that the Working Time Regulations 1998 (i) require a worker to take leave first before claiming holiday pay; and (ii) do not allow annual leave to be carried over beyond the applicable holiday year. The Court expressed doubt as to whether this approach was compatible with relevant EU law. Therefore, the case was referred to the Court of Justice of the European Union which today issued its judgment.

What did the CJEU decide?

• A worker does not need to take annual leave without pay in order to then bring a claim for payment for it. • Where an employer refuses to pay for annual leave, the worker’s right to holiday pay carries over until termination of the engagement. • Carry over in these circumstances should not be limited and so could be in respect of an indefinite number of leave years. • By not allowing carry-over and requiring leave to be taken without pay to then bring an action to claim payment for it, the Working Time Regulations are incompatible with the EU Working Time Directive.

These principles only relate to the four weeks’ EU leave and not to any additional (statutory or contractual) holidays.

How far back can holiday pay claims go?

The Deduction from Wages (Limitation) Regulations 2014 impose a two year back pay limit on deduction from wages claims. However, significantly, the CJEU’s decision indicates that the Regulations are unlawful where an employer has failed to provide paid annual leave.

The Court’s reasoning also contradicts the Employment Appeal Tribunal’s decision in Bear Scotland that a gap of more than three months between underpayments in a chain of holiday periods will break the ‘series of deductions’ – cutting off any claim before the gap.

The implications of the Sash Windows decision are limited to cases involving holiday which is not taken because it was not paid. Might we now also see challenges to the limitations imposed on backdated holiday pay claims by the Deduction from Wages Regulations and the Bear Scotland principles in respect of cases involving underpaid holidays?

What if a worker cannot take annual leave because they are ill?

The situation is different if a worker has been prevented from taking paid annual leave due to sickness. Although, again, the worker must be permitted to carry over accrued untaken leave into the next holiday year, case law allows carry-forward to be limited to a period of 15 to 18 months, not indefinitely.

The CJEU explained that while there is a need to protect both employers and workers in sickness absence cases, there is no such need to protect the employer’s interests where there is no right to paid annual leave. In these circumstances, the employer ‘must bear the consequences’.

What does this mean in practice?

This case has hugely significant implications for holiday pay in the UK, particularly for those working in the gig economy.

Employers engaging contractors, freelancers and consultants on a self-employed basis will not have provided a right to paid annual leave. If those individuals can now establish worker status they could potentially claim many years of back pay on termination of the engagement, the two year limitation period not being relevant.

If this is an issue your business is facing, please get in touch with your usual Brodies contact to identify any risks and highlight strategies for the future

Workbox users can also access more information at the pages on employment status and holiday pay.