Case update (1): Annual leave and employment status

What do we already know?

We updated you in our June 2017 Newsletter Case update (1): Annual leave and employment status on the Advocate General’s Opinion in the case of King v The Sash Window Workshop Limited. 

The Advocate General’s Opinion was that a worker should be entitled to carry over untaken holiday when they have not been provided with a facility to take statutory paid holiday due to their being wrongly labelled as self-employed.   On termination of employment they should be paid in lieu of this entitlement.

What’s new?

The CJEU (formerly the ECJ) has followed the Advocate General’s Opinion.  It has decided that workers are entitled to carry over paid annual holiday until termination of employment in circumstances where they have not had the opportunity to take it.

The CJEU went as far as to say that where the UK Regulations are incompatible with EU law, they must be disregarded.  Employers who fail to give an opportunity for paid holiday should not be entitled to the benefits of the normal limits on how much can be carried over. I.e. liability for unpaid statutory holiday could go back years, rather than be limited by the UK two year limitation.

However, this decision only deals with the situation where workers have not taken annual leave because they have been led to believe it will not be paid. It does not directly address a case where workers have taken leave but not been paid for it (or have been underpaid).   Therefore its impact on the long-running holiday pay cases of Bear Scotland etc. is uncertain.  For further information on these cases see our updates here.

We explore this decision in more detail below:

Summary:   Should a worker, misclassified as a self-employed consultant with no facility to take statutory paid holiday, be entitled to carry over the untaken holiday and be paid in lieu on termination of employment?

Yes, is the CJEU’s Opinion in King v The Sash Window Workshop Limited available here.

Facts:  The worker, Mr King, was a commission-only salesman who was engaged by the employer, The Sash Window Workshop, from 1999 until his dismissal in 2012. He had taken time away from work each year but was not paid for any holiday. He claimed that he would have taken more time off if it had not been for the fact that (1) he had to give notice to ensure there were not too many salesman away at one time (2) if he did not work he did not get commission and (3) he was unaware of his entitlement to holiday pay.

Mr King brought a claim for unpaid holiday pay for the duration of his 13 years of employment.  This was despite the express wording in the Working Time Regulations 1998 (WTR) that there is no right to carry over annual leave. Claims for holiday pay must be brought within three months of the date on which a worker alleges that he/she should have been paid.

Sash Window Workshop therefore alleged that Mr King was out of time to bring claims in respect of leave from previous leave years.  In contrast, Mr King alleged that the reason he had not taken annual leave was that he would not have been paid for it and claimed that, under previous CJEU case law, he should have been entitled to carry over his leave from one leave year to the next and to be paid in lieu of all carried over annual leave on termination.

The Tribunal agreed that Mr King was a worker rather than being truly self-employed and upheld his claims. It agreed that Mr King should be paid for i) accrued but untaken leave from his final year of work; ii) the period of leave that he actually took during the time he worked for Sash Windows; and iii) the leave that he was entitled to take whilst working for Sash Windows, even though he did not in fact take it.

Sash Windows objected to the third finding; that Mr King should be paid for leave that he did not even try to take and appealed. The Employment Appeal Tribunal agreed with Sash Windows and effectively decided that a worker would first have to take unpaid leave; and only after having done so, could the worker test whether he would be entitled to be paid.

Mr King appealed again and the Court of Appeal referred both this question and the question of what leave can be carried forward and what compensation can be sought, to the Advocate General and CJEU.

The Advocate General decided that the EAT’s approach effectively gave the worker the task of creating an adequate opportunity before they could take paid annual leave. In his view was this was the wrong approach. It would be an unlawful pre-condition to impose on workers trying to take paid annual leave; and under EU law employers are legally bound to provide ‘adequate facilities’ to workers to allow them to exercise their rights to take paid holiday.

The CJEU agreed with this approach and set out very clear principles that workers:

1. must know that they are going to be paid before they take leave;
2. have the right to be compensated for untaken and unpaid leave; and
3. can carry over and accumulate such untaken leave until the end of their employment relationship and there is no restriction on this.

These principles apply even if the employer wrongly believes that the worker is not entitled to paid leave.  Employers are under an obligation to correctly determine the status of their workforce and if they get it wrong they “must bear the consequences”.

The case will now return to the Court of Appeal for it to decide whether the WTR can be interpreted to give effect to the CJEU’s decision. The WTRs only provide workers with a remedy if they have taken leave which has not been paid either at the correct rate, or at all.  This is incompatible with the Directive.  There is a slim possibility that the UK courts and Tribunals could decide that the WTR cannot be interpreted to give effect to the ECJ’s decision and that the Government will need to legislate to bring UK law into line with the ECJ’s decision. However, this is unlikely and the UK Tribunals have typically considered that they can read words into the WTR to give effect to CJEU holiday pay decisions.

Comment: The case is likely to be of interest to any employers who use self-employed contractors with risky employment status. Most recently the spotlight has fallen on employers in the gig economy.  However, these organisations are not alone and we often see notionally self employed relationships that are indistinguishable from employee/worker relationships when you examine how they actually operate in practice.

If such wrongly classified staff are prepared to risk a finding that they are not self-employed for tax purposes, then this decision allows them to bring holiday pay claims going back a number of years.

However, it is worth remembering that this decision only applies to the 20 days holiday in each holiday year required under the Working Time Directive and not the additional 8 days holiday provided under the WTRs (i.e. the UK legislation) or any contractual holiday.

Although this decision does not deal with the situation where workers have taken leave but not been paid for it (or have been underpaid), there may still be an impact on these cases.  Therefore the future of the long-running holiday pay cases of Bear Scotland etc. (see our updates here) remains uncertain.   In particular, employers need to be aware that both the three-month break and the two-year cap on back pay currently established by these cases are now looking vulnerable.

As ever with holiday pay claims, this is a complex area and before taking action we would encourage you to seek advice from our Menzies Law team on 0117 325 0526.