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European Court of Justice hands down landmark holiday pay decision

Cecily Donoghue, employment solicitor at Gregg Latchams, considers the landmark decision of the European Court of Justice (ECJ) in the case of King v Sash Window Workshop Ltd, and provides helpful guidance for employers.

The right to paid holiday is a fundamental European right that cannot be interpreted restrictively. Following the ECJ’s decision, if an employer has denied “workers” the ability to take leave they can claim untaken holiday from the beginning to the end of their contract – this remains the case even where the employer innocently but wrongly believed them to be self-employed.

This case involves a number of key principles relating to employment status and working time and will have far reaching and fundamental consequences for the gig economy and self-employed workers.

So what actually happened?

Mr King was a self-employed sash window salesman who was paid commission only. His contract was silent regarding holiday and he was not paid it. He had not taken paid holiday between 1999 and 2012 but had taken other holidays without pay. In 2008 his employer offered him an employment contract but he refused as he wanted to remain self-employed.

On his dismissal, he claimed for 24.15 weeks untaken leave and pay. He alleged that he was prevented from taking the holiday because he was either too busy and/or it was unpaid.

After several earlier decisions and appeals, the Court of Appeal referred the matter to the ECJ. The ECJ held that:

  • His employer had benefitted from him not taking his leave.
  • That it was irrelevant that the employer wrongly considered him to be self-employed and therefore not entitled to annual leave – an employer that does not allow a worker to take annual leave must bear the consequences.
  • Parts of the Working Time Regulations 1998 were found to be incompatible with Article 7 of the Working Time Directive and therefore the ECJ held that a worker does not have to try to take leave before being able to claim that it must be paid.

This means that:

  1. If a worker is prevented from taking their paid leave because their employer won’t pay them for it, then they are being prevented from exercising their rights under EU law.
  2. An employer who fails to grant paid holiday to workers will not be able to limit how much can be carried over. The back pay claim can therefore go all the way back to 1996 when the Working Time Directive came into force.

The impact of the decision         

Holiday pay has been a hot topic in employment tribunals over the last few years. This decision sheds doubt on many of the recent decisions, and is likely to have far reaching consequences for employers in the future. Employers with large numbers of ‘self-employed’ staff (who would actually be classified as ‘workers’) are likely to face substantial holiday pay bills dating back 20 years.

Technically, this decision applies to the 20 days holiday under EU law and not the additional 8 days paid for bank holidays under UK law. However, it is anticipated that such a restrictive interpretation will not be followed if the matter came to be tested by the courts.

What happens now?

The “Bear Scotland” case, which held that tribunals cannot award backpay for unpaid holiday leave beyond any 3 month break in deductions, and the Deduction from Wages (Limitation) Regulations 2014, which introduced a two year backstop on claims, are both now likely to be challenged.

Reform is also on the horizon for employment status and the definition of “worker”. With the gig economy growing fast, and cases finding considerable numbers of those deemed to be self-employed actually workers, a Government Select Committee has called for new legislation to provide clarity on employment status.

The Taylor Review in July 2017 argued for clearer statutory definitions but also a new model of “worker by default” to avoid companies denying workers’ rights that workers then have to legally challenge. The Autumn Budget also indicated that the Government would publish an employment status “discussion paper” as part of its response to the Taylor Review. A new Bill has been drafted but has not yet been passed to Parliament. The continued activity in this area, especially with the recent ECJ decision in King, are likely to prompt the Government to take action.

What should employers be doing now?

The right to holiday pay means exactly that, and moving forward there is likely to be a flood of claims from self-employed workers claiming 1) that they are workers and 2) that they are therefore entitled to their unpaid holiday which has accrued from the start of their contract.

For existing employees, this decision does not affect the ability for employers to prevent carry over into following years. However, if a worker is prevented from taking holiday because their employer refused to pay them, then carry over is unlimited.

If you have self-employed contractors, review their terms and assess the reality of their role to identify whether they should actually be workers. Once you’ve identified these, consider the potential costs of them claiming holiday backpay.

If you’re concerned about the impact of this decision on your business, please don’t hesitate to contact either Nick Jones or Cecily Donoghue in our Employment Team.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

Categories: Employment | Professional & Regulatory Services

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