Potentially unlimited carry-over of holiday pay for workers?

In a decision that will have significant and potentially very costly implications for employers operating in the gig economy, the European Court of Justice has today ruled that a self-employed contractor, who was actually a worker, is entitled to be paid for outstanding holiday pay stretching back thirteen years.

Facts

Mr King was hired as a windows salesman on a self-employed commission only basis for Sash Window Workshop Ltd from 1999 until he retired in 2012. From 2000 onwards, Mr King took between 3 to 4 weeks of unpaid annual leave, but Sash Windows denied he ever had a right to paid annual leave due to being self-employed. After he retired Mr King raised a claim for holiday pay covering the whole period of his engagement, on the basis that he was in fact a worker and therefore had an entitlement to paid annual leave under the Working Time Regulations 1998 (“WTR”). The employment tribunal found he was a worker and therefore had a right to paid leave under the WTR and the case then proceeded on the basis of the following three holiday pay categories.

• Holiday Pay 1 – payment representing the amount of holiday accrued but untaken at the date of termination for the final (incomplete) leave year (2012/2013);
• Holiday Pay 2 – payment for unpaid leave requested and taken in previous years, claimed as a series of unlawful deductions from wages (1999 and 2012) ; and
• Holiday Pay 3 – payment in lieu of the accrued but untaken leave throughout the whole period of K’s engagement in respect of which no request for leave was made.

Mr King was successful in relation to the three categories before the tribunal but the EAT rejected his claim for holiday pay under category 3 as Mr King had never exercised his right to take leave during this period, and therefore could not bring a claim. The issue before the Court of Appeal focussed on Holiday Pay 3. As the right to paid annual leave under the WTR is derived from the right under the European Working Time Directive (“Directive”), the Court of Appeal referred five questions to the European Court of Justice ("CJEU") to determine on this matter.

The CJEU ruled that Mr King was entitled indefinitely to carry over his entitlement to paid annual leave under the Directive, where his employer refused to allow him to take this. He therefore had the right to be paid in lieu of his accrued leave on termination of his engagement. The key points of the decision were:

• There is no need for a worker to have to take the leave first before establishing whether he has the right to paid leave.
• A national law which prevents a worker from carrying over, and accumulating rights to paid annual leave on termination which may involve rights not exercised over several consecutive years is incompatible with the European Working Time Directive.

The CJEU drew a clear distinction between this situation and the situation where a worker is unable to take the leave because of sickness absence and it confirmed that the existing case law, which limits carry over in those cases to a period of 18 months from the end of the reference period in which the leave accrued, remains valid.

The case will now return to the Court of Appeal, who will be faced with interpreting the WTR in accordance with a conflicting European decision.

Comment

The CJEU made it clear that an employer “that does not allow a worker to exercise his right to paid annual leave must bear the consequences” and hence the limitations on carryover of holiday, accepted in the case of sickness absence, were not necessary or appropriate here.

Because this claim arose on termination of employment in relation to accrued but untaken leave, the 2 year limitation on claims under the Deduction from Wages (Limitation) Regulations 2014, and the recent case law providing that a three month break in a series of deductions will break that series, are both not relevant here.

This decision only applies to the 4 weeks of leave from Europe and not the full 5.6 weeks under UK law. We suspect however that this decision, coupled with the removal of fees for raising a tribunal claim, will lead to an increase in holiday pay claims from workers. This decision reinforces the need for employers to adopt the correct contractual status for workers.