In King v The Sash Window Workshop Ltd, the European Court of Justice (ECJ) has held that, where an employer fails to provide paid holiday, the fact that the Working Time Regulations 1998 (WTR) effectively require the worker to first take their holiday unpaid before being able to bring a claim for holiday pay is in breach of the EU law rights to paid holiday and to an effective remedy. The Court also held that, in these circumstances, the worker’s holiday rights carry over until the termination of employment. This decision has the potential to hit those employers who incorrectly categorise workers as self-employed contractors hard.
Under the WTR, all workers are entitled to 5.6 weeks’ paid statutory holiday each year. This is equivalent to 28 days for a worker working 5 days a week. The 5.6 week entitlement is made up of a four-week minimum entitlement derived from the EU Working Time Directive (WTD) and 1.6 weeks given by the UK Government. The right to paid holiday does not apply to individuals who are not ‘workers’ – i.e. who are genuinely self-employed.
During sick leave, workers continue to accrue all of their usual holiday entitlement. According to EU case law, any WTD holiday entitlement that workers are unable to take due to sickness rolls forward to the next holiday year automatically. This means that workers can carry forward up to 4 weeks’ holiday from one year to the next if it was untaken due to sickness absence. However, EU case law allows national law to place a limit on how far such holiday can be carried forward – this has been applied in UK case law to establish that employers do not have to allow carry-forward for more than 18 months after the end of the holiday year in which it accrued.
In the case of King v The Sash Window Workshop Ltd, the ECJ considered the right to paid holiday and carry over where a worker had been incorrectly classified as a self-employed contractor and therefore denied any paid holiday during his engagement, but sought to claim holiday pay when his engagement was terminated.
Mr King started work as a salesman for The Sash Window Workshop Ltd (SWW) in June 1999. He worked as a self-employed contractor, paid only in commission on the products he sold. His contract did not mention any right to holiday, paid or unpaid. He was offered an employment contract in 2008, which included a right to paid holiday, but chose to remain working on a purportedly self-employed basis. Although Mr King took some holiday while working for SWW, he was never paid for this. When SWW terminated his engagement in October 2012, Mr King brought a claim for holiday pay in the employment tribunal.
The tribunal found that Mr King was a ‘worker’ for the purposes of the WTR and so had a right to paid holiday. The tribunal therefore awarded him pay in lieu of holiday that he had accrued but not taken during previous years. SWW appealed successfully to the EAT, which considered that the tribunal had not made findings of fact to support its conclusion that Mr King was prevented from taking his holiday for reasons beyond his control. Accordingly, the EAT determined that the usual position that entitlement to holiday expires at the end of the relevant leave year should apply.
Mr King appealed to the Court of Appeal, which referred the case to the ECJ. The Court of Appeal noted that the right to holiday and the right to payment for that holiday are set out in separate provisions of the WTR (Regs 13 and 16 respectively) and a there is a separate claim for breach of each right (Reg 30), with the result that a worker whose employer allows only unpaid holiday, and who wishes to assert their right to holiday pay, would first have to take unpaid holiday in order to do so. It asked the ECJ whether this was compatible with the right to paid holiday under the EU Working Time Directive, and also requested clarification of the extent to which untaken holiday can be carried over from year to year for the purpose of claiming a payment in lieu of untaken holiday on termination of employment.
The ECJ noted that a worker who is faced with uncertainty as to the level of pay they are entitled to during a period of holiday will not be able to benefit fully from that holiday as a period of relaxation and leisure, and is likely to be dissuaded from taking holiday in the first place.
The ECJ confirmed that the structure of the rights to holiday and holiday pay in separate provisions of the WTR has the effect that, where an employer grants only unpaid holiday, a worker is obliged to first take holiday without pay if they wish to claim payment for it. In Mr King’s case, this would mean he would be unable to claim after the termination of his engagement in respect of accrued but untaken paid holiday. In the ECJ’s judgment, this was incompatible with the right to paid holiday under the WTD combined with the EU law right to an effective remedy.
With regard to carry-forward of untaken holiday, the ECJ noted that, where a worker is prevented from taking paid holiday due to sickness, EU case law allows national law to limit the worker’s right to carry over (see Background). However, as well as the protection of workers, that case law also took into account the protection of employers, who might otherwise be faced with the risk that a worker could accumulate unmanageably lengthy periods of absence that could give rise to organisational difficulties. In this case, by contrast, there was no need to protect the employer’s interests – on the facts, SWW did not suffer organisational difficulties and had in fact benefitted from Mr King not taking paid holiday during his engagement.
SWW’s view that Mr King was not a worker and therefore not entitled to paid holiday – which was subsequently found by the employment tribunal to be incorrect – was irrelevant. The ECJ considered that it is the employer’s responsibility to inform itself of its obligations in this regard and an employer that does not allow a worker to exercise their right to paid holiday must bear the consequences. The ECJ therefore concluded that, where a worker has not exercised their right to paid holiday over several holiday years because their employer wrongly failed to provide holiday pay, the WTD requires the worker to be able to carry over their paid holiday rights until the termination of employment.
On the basis of the ECJ’s judgment, workers who are wrongly classified as self-employed may be able to claim back pay in respect of unpaid holiday going back many years when their ‘worker’ status is established. This has significant implications for companies operating in the so-called ‘gig economy’, and other organisations that use self-employed contractors rather than directly employed staff, as it makes a claim for ‘worker’ status potentially much more lucrative for the individuals concerned.
The case also suggests that the Deduction from Wages (Limitation) Regulations 2014 SI 2014/3322, which limit claims for unlawful deductions from wages to two years, may be incompatible with EU law. Those Regulations are currently being challenged by the trade union, the IWGB, in a case that is due to be heard in September 2018. We will of course monitor developments in this area and will keep members updated.
Members who have questions about the employment status of their workforce, or entitlements to holiday pay, can refer to our HR and Employment Law resources pages, or contact their usual adviser.