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On 29 November the European Court of Justice (“ECJ”) issued an important and  uncompromising decision in the case of King v The Sash Window Worship  Ltd  which will have significant consequences for business operating in the “Gig Economy” and potentially wider implications for employers generally in relation to payment for annual leave.

The ECJ has decided that under the Working Time Directive (“WTD”) a worker is entitled on termination to be paid for all periods of annual leave accrued during the engagement where the worker has been discouraged from taking the leave because it would have been unpaid. There is no limit on the period for which the worker can claim (i.e. it can include holiday pay in respect of previous years since the beginning of the engagement) and it is not necessary for the worker to have actually taken leave to be able to be able to claim payment for it.

Facts

Mr King worked for The Sash Window Workshop Ltd (“the Company”) on a self-employed commission only basis for 13 years. He was never paid for holidays. After 9 years the Company offered him a contract of employment under which he would have been entitled to paid annual leave but Mr King refused this. The Company terminated his contract and Mr King brought a number of claims including holiday pay for the whole period of his engagement on the basis that he was, in fact, a worker and therefore had an entitlement to take and be paid for annual leave under the Working Time Regulations 1998  (“WTR”). The Employment Tribunal found that he was indeed a worker and awarded him holiday pay in respect of:

1. Leave accrued in his final year but which was untaken at the date of termination;

2. Leave requested and taken in previous years but which had been unpaid;

3. Leave accrued but untaken from previous years throughout the whole period of his engagement where he had not requested leave.

The Company appealed against the decision to award Mr King payment for category 3 holiday pay above on the basis that he had never attempted to exercise his rights in relation to this leave and the right was therefore lost.  The EAT upheld the appeal on the basis that Mr King had not been prevented from taking the leave for reasons beyond his control (unlike the previously decided cases where workers who have been on sick leave were allowed to carry forward leave). Mr King appealed to the Court of Appeal which referred the issue to the ECJ to decide.

ECJ decision

The ECJ decided that the case was different to those where the worker was prevented from taking holiday due to sickness and where previous case law had decided that carry-over of leave was allowed but also that national restrictions on the extent of carry-over were legitimate in order to protect the employer’s interests where accumulation of holidays would cause business difficulties. In this case the Company had benefited from the fact that Mr King had not taken annual leave and there was therefore no justification for deviating from the worker’s strict entitlement. Moreover it did not matter that the Company wrongly believed that Mr King was not a worker and so not entitled to annual leave. It stated that it is for the employer to inform themselves about their obligations in this regard. Furthermore since the right to paid leave cannot be subject to any preconditions whatsoever it was irrelevant whether or not Mr King had actually put in requests for annual leave.

Therefore where a worker has not exercised their right to paid holiday over many years because the employer wrongly failed to pay such holiday the WTD requires that the worker be permitted to carry over and be paid for holiday rights until termination. The alternative of allowing such leave to be extinguished would be to validate conduct by which the employer enriched themselves to the detriment of the purpose of the WTD which is to have proper regard for worker’ health.

Crucially it also did not matter that Mr King was offered and could have accepted a contract under which he would have had the right to paid annual leave. The ECJ said that it had to deal with the situation “as it existed and persisted”. In all the circumstances an employer who did not allow a worker to exercise a right to paid annual leave “must bear the consequences”.

Comment and Guidance

The decision will have very significant consequences for business which have wrongly classified those whom they engage as self-employed rather than workers. The impact is likely to be felt most keenly in the “Gig Economy” where it combines with the direction of travel in granting worker status to compound the legal risks and potential financial liabilities associated with that business model. Such employers could be required to pay out not just unpaid holidays actually taken but also any untaken leave with workers being entitled to carry forward such leave indefinitely until termination. Such liabilities could be very significant and will not be avoided even if such employers start to pay holidays from now on. It is interesting that the Court was untroubled by the fact that that the individual was actually offered the chance to have a contract of employment and take advantage of paid leave. Many might think that they should have followed the Advocate General’s opinion that it should have been left up to the national court to decide if that fact meant that Mr Sash was actually given the opportunity to exercise his right to take leave.

It is important to note that the decision only applies to the four weeks leave derived from the WTD and not the total 5.6 weeks under the WTR.

It has also been suggested that the decision means that the recent UK legislation which limits claims for holiday pay to two years may be invalid as incompatible with EU law and that the ruling in Bear Scotland v Fulton that a 3 month gap between instances of underpayment will break a series of deductions is similarly in question.  We would suggest that this is not yet at all clear. The Sash case only deals with the situation where leave has not been taken because it is unpaid not where it is argued that the worker has been underpaid for leave which has been allowed.  The UK limitations on holiday pay claims are not applicable to a Sash case where the claims is for payment of accrued untaken leave on termination and, subject to further clarification from the courts, in our view, it will still be possible to rely on the limitation arguments in other cases where leave has actually been taken.

If you have any queries about holiday pay obligations or liabilities please get in touch with a member of the Stronachs Employment Team.

Eric Gilligan, Partner

Chambers Leading Firm 2019

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