Holiday pay disarray

ArwenMakin_ESPLaw
Senior solicitor
ESP Law
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This momentous European Court of Justice (ECJ) ruling is expected to bring holiday pay litigation back to the top of the agenda for many employers in the UK. The consequences of this ruling are far-reaching and potentially financially disastrous for some business models. The ECJ has again made it abundantly clear that the EU right to paid annual leave is a central right and cannot be restricted by employers seeking to avoid their obligations.

Mr King worked as a salesman under a “self-employed commission-only contract”, the contract was silent on annual leave entitlement and when Mr King did take annual leave it was unpaid. After working under this contract for nine years, Sash Windows offered Mr King an employment contract. However, he elected to remain “self-employed” until the termination of the relationship around 4 years’ later.

Following the termination of his contract, Mr King claimed that he was in fact a worker and not self-employed. If he was a worker he would have been entitled to paid annual leave under the Working Time Regulations 1998 (WTR), he claimed that he had not taken annual leave because it would have been unpaid.

At Tribunal, it was held that Mr King was a worker and therefore he was entitled to holiday pay for the full 13 years of the contract, whether this annual leave was taken unpaid or not taken at all. Sash Windows appealed, arguing that under WTR annual leave not taken in the relevant leave year is lost and therefore there is no entitlement to the untaken annual leave from previous years. The Employment Appeal Tribunal (EAT) considered that Mr King had not been prevented from taking annual leave due to reasons beyond his control and consequently held that the untaken annual leave over the 13 year contract did not carry over and was not owed to Mr King, he would only be entitled to the holiday that he actually took unpaid and holiday for the last year of the contract that was outstanding on termination. Mr King then appealed to the Court of Appeal and a reference was made to the ECJ, the ECJ was asked:

  • Did the failure to provide a worker with an entitlement to paid annual leave amount to the worker being “prevented” from taking the annual leave?
  • Was it lawful to place a limitation on the carry-over of the annual leave into subsequent leave years or would carry over be indefinite?

The ECJ’s decision was very clear and firm, upholding the right of workers to paid annual leave. The key points from the ruling are as follows:

Workers are not required to first take unpaid annual leave in order to be entitled to make a claim – The failure on the part of an employer to pay workers for periods of annual leave would clearly dissuade the workers from taking that annual leave. This is incompatible with the purposes behind the European Working Time Directive i.e. allowing a worker a period of rest, relaxation or leisure.

A worker can claim that they have been prevented from taking paid annual leave when they have not taken it due to it being unpaid – where the lack of entitlement to pay “prevents” the worker taking annual leave in the relevant leave year the entitlement carries over into the subsequent leave year. This is the case even where, such as with Mr King, the individual has opportunity to move to a different contractual relationship, which would have provided for paid annual leave.

Where the annual leave carries over into subsequent leave years it can do so indefinitely – The ECJ decided that the right to paid annual leave cannot be interpreted restrictively and any derogation, such as limiting the period of carry over, was not appropriate in these circumstances. Contrast this with the ECJ’s position on carry over cases involving an employee who is prevented from taking their annual leave due to being off sick, where a limit on carry-over of 15-18 months is permitted. The difference, in the opinion of the ECJ, being that in sickness cases there was a need to allow limits so that sick workers would not accumulate large amounts of leave. Whereas in cases where the worker is prevented from taking the annual leave because the employer does not pay them, the employer should bear the consequences.

What does this all mean for you?

The ECJ ruling does not just affect employers who do not provide paid annual leave to their workers, the ramifications go further than that.

What happens where the worker is paid holiday pay but it is calculated incorrectly/unlawfully, so that they are underpaid?

The raft of recent case law regarding the need to include variable pay elements (commission, overtime, allowances, etc.) in the calculation of holiday pay is thrown into even sharper focus. The ruling means that any practice or omission of an employer which deters workers from taking annual leave (i.e. not paying them and arguably underpaying them) allows the annual leave to be carried over indefinitely. This means that any employers who are still operating under the calculated risk of paying only basic salary for holiday pay and ignoring variable pay elements in the calculation could find that those workers now have the ability to accrue and carry over annual leave without limitation until termination, and claim back pay for any holiday paid at the incorrect rate.

Many employers found comfort in the introduction of The Deduction from Wages (Limitation) Regulations 2014, which closely followed the Bear Scotland case and introduced a 2 year limitation on claims relating to a series of deductions (including non-payment or under-payment of holiday pay). There was also comfort to be had from the decision that such claims by workers would have to be brought within 3 months of the last of the series of deductions, and that where there was a gap of more than 3 months between separate deductions (as would often be the case with holiday derived purely under the Working Time Directive (WTD)) the series would be broken. In light of the ECJ’s comments in King v Sash Windows, the compatibility of these comforts with the WTD is questionable and may be subject to challenge in the near future.

Although the ruling means that the claims for holiday pay can in theory go back indefinitely due to the carry over not being limited, in practice this is likely to mean a long-stop date of 1996 when the original WTD came into force. It is also worth noting that the ruling only applies to the 4 weeks entitlement under WTD and not the additional 1.6 week entitlement under WTR, so the back pay claims will be in respect of the 4 weeks per holiday year rather than the full 5.6 weeks under the WTR.

Finally, arguably the biggest consequence of this ruling will be most acutely felt by employers operating under business models which engage with individuals on a purportedly “self-employed” basis, such as the “gig economy”. Wrongly categorised self-employed contractors, who are actually workers, will be entitled to paid annual leave carried over from previous leave years. This could mean disastrous holiday pay bills for many employers. The tide has very abruptly turned for employers who use these self-employment models incorrectly, and this ruling is another blow.

About ArwenMakin_ESPLaw

Arwen Makin

After studying law at Cambridge University, I trained at leading national law firm Mills & Reeve, qualifying into their employment team in 2002. I have extensive employment law experience, gained through advising both employers and employees on a wide range of issues, across an array of sectors – including but not limited to finance, education, hospitality, transport and retail. This diverse experience means I am ideally placed to provide advice in relation to professional conduct and regulatory matters.

I am now a senior solicitor at ESP Law, part of ESP Group – a very different employment law firm and HR consultancy business, with our own in-house legal and HR experts. Taking pride in our reputation for delivering sensible, straight-talking and practical advice – at the same time as being approachable and supportive – I am passionate about the way ESP works with its customers. By building on trusted relationships and providing prompt support at the earliest stage of any issue, we help ensure that sound commercial decisions are taken.

The vision for our business was to deliver an exceptionally personal, yet cost-effective service that truly meets the evolving needs of modern and forward-thinking HR teams and their organisations. I’m lucky to be among a team of very talented employment lawyers who work hard day in, day out, to make this vision a reality.

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