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Farrer & Co | King-size holidays (and King-size backpay?)

What times these are to be an employment lawyer – audible excitement (really) in the office at the latest decision from the CJEU, which appears to herald a radical and principled turn in the long-unfolding holiday pay saga, now increasingly played out in the spotlight of the gig economy, worker status headlines and the crucible of Brexit. All very well for lawyers to get excited about the twists and turns of the case law in this area – but in practice, is the judgment really going to lead to crippling back-pay bills for employers and provide the catalyst for a flood of new worker-status cases?

You'll all be up to speed with where we thought things stood, following the cases of Bear Scotland, Lock et al. But the case of King v The Sash Windows Workshop handed down by the CJEU yesterday underlines the very firm approach taken by the European court over the last few years in relation to paid annual leave – i.e., that it is a fundamental European right which one can't mess with or try to interpret on a narrow basis. The headlines today suggest that the judgment has opened the door to thousands of workers bringing backdated claims for decades of unpaid holiday. I'd say that door is firmly ajar and the thrust of the European case law may well force it fully open – but bear in mind that the decision is not yet fully binding on UK employers at this stage, and that the case will go back to the Court of Appeal to decide whether the Working Time Regulations can be interpreted in line with the CJEU decision. In the meantime, where you have individuals engaged on contracts without paid holiday, at the very least an audit of risk is required in light of the findings in this case.

So, what are those findings? In brief, Mr King had worked for Sash Windows Workshop (SWW) on an 'self-employed commission' basis from June 1999. He was offered a contract of employment (including the right to paid annual leave) in 2008 but declined it, choosing to remain self-employed. When his engagement terminated, an employment tribunal had little difficulty in finding that he was a 'worker' for the purposes of the WTR, albeit accepting that both he and SWW had mistakenly believed he was self-employed. He succeeded in a claim for age discrimination, and also for unpaid holiday under three heads:-

  • Paid leave accrued but untaken during his final leave year (uncontentious);
  • Holiday pay for holiday which he took during the previous 13 years but which had not been paid;
  • Holiday pay for holiday which he had not taken over the years (24 weeks' worth).

The claim under the final head was appealed to the EAT and subsequently to the Court of Appeal, which referred the case to the CJEU.

The CJEU's judgment goes further than might have been expected, given the Advocate General's Opinion which preceded it. It manages entirely to sidestep the issue of the offer of the employment contract (one has some sympathy with SWW in this respect) and focuses relentlessly on the principle of the matter. In essence, the conclusion is that if an individual is a worker and argues that she would have taken more leave had that leave been paid, then she should be entitled to carry over all her holiday until she is paid for it at the end of the engagement. Unpacking that a bit:-

  • The court was very clear that it does not matter that the employer (or indeed, both parties to the contract) has wrongly considered that an individual is not entitled to annual leave. In essence, SWW had benefitted from Mr King not taking his leave – and must now shoulder the burden of having got the issue of status wrong;
  • EU law requires a worker to know that she will be paid before she takes leave. And critically, if not – she can carry over and accumulate that leave until the end of the employment relationship. Regulation 13 of the WTR appears to limit that right (saying that entitlement to leave expires at the end of the relevant leave year). But the CJEU suggests that the combined drafting of Reg 13, 16 and 30 cannot be consistent with the European right to paid annual leave, because under the UK law, the worker would first have to take unpaid leave in order then to be able to test the right that the leave be paid - i.e., by bringing a claim. This result is incompatible with EU law, depriving the worker of an effective remedy. If the company won't grant the paid holiday, the individual is being prevented from exercising their EU rights and hence cannot be stopped from bringing a claim just because of the arbitrary imposition of a new holiday year. Insofar as the WTR means that the worker loses that right, they are incompatible with EU law and should be disregarded;
  • So in theory workers can continue to accrue and claim leave for the entirety of their engagement (or at least, back to 1996 when the Working Time Directive came into force) if the 'employer' has failed to give them that right or failed to categorise them as workers. Arguably (and it is only that), this principle may also extend to those who have had long term absences or who have not taken their leave for other reasons (other than sickness, where the position is slightly more clear cut). Bear in mind (and it may well be cold comfort in the circumstances) that this only applies to the 20 days' leave under the European regulations and not to the additional Reg 13A leave under the WTR. Still, in extremis this could mean holiday pay bills of up 80 weeks' pay per worker, depending on the length of the engagement;
  • Remember that the European definition of 'worker' is much wider than that contained in the WTR. All working time cases to be considered under the Directive must use the EU definition – i.e., that a worker includes 'any person who pursues real, genuine activities [other than on a small scale] must be regarded as a worker'. This makes the test for worker status for the purpose of these claims at least, a much lower bar than might otherwise be the case;
  • The ramifications don't stop there. Arguably, the regulations so swiftly and controversially introduced by the government in 2014 to limit the backdating of claims for unpaid holiday to two years (and possibly also the three month series of deductions gap highlighted in Bear Scotland) may be incompatible with EU law. This is by no means clear cut but given the stakes, the opening of the door on this will almost certainly lead to high-profile claims pursued all the way through the courts. There are real arguments here about the apparent impact of those Regulations on an individual's ability to pursue their rights under European legislation – and it is hard to see that those won't be fought out in the domestic (and possibly European) courts.

Playing out these arguments against the Brexit backdrop is fascinating – will the government (or this government, at least) really be so quick to stick to its indications about enshrining workers' rights as they currently stand if those rights include potentially 'burdensome' open-ended holiday pay entitlements? The speed with which the Deduction from Wages (Limitation) Regulations were introduced in 2014 (contrast the ongoing failure to make any progress at all on re-calibrating the domestic test for employment status and the rights of those in the gig economy) suggests that is unlikely. For the moment, the CJEU's decision has without doubt raised the stakes for worker status cases (and no doubt sent a shiver down Uber's corporate spine) and shifted the focus firmly back onto the clear principles behind the EU legislation. A worker is widely defined for these purposes; has a right to know that he will be paid before taking holiday and can carry over/accumulate leave until the end of the engagement. The Court of Appeal must be looking forward to re-engaging with this one.

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