Categorisation of workers: ECJ holiday pay judgment

As you may have seen in the Press, the European Court of Justice (ECJ) yesterday ruled in the holiday pay case, King v The Sash Windows Workshop. 

The judgment is important for businesses which are facing, or which might face, challenges from their workforce, alleging that they have been miscategorised as self-employed when they should have properly been classified as ‘workers’. It addresses the question of whether individuals who have been newly categorised as ‘workers’ can successfully claim for backdated holiday pay in respect of periods of untaken holiday before their recategorisation. 

The key take-aways from the judgment are: 

• if a business wrongly categorises its workers as self-employed and, on that basis, does not allow them to take paid holiday; and
• those individuals later successfully claim that they are ‘workers’; and
• those individuals did not take any or all of their four weeks ‘EU holiday’ during the time they were classified as self-employed,

those workers will be able to claim successfully for backdated holiday pay in respect of that untaken holiday and there should be no limit on the number of years for which they can claim that backdated holiday pay.

Mr King, the claimant, was a salesman who was paid on a commission only basis. He had been categorised by the Sash Window Workshop as self-employed and, on this basis, had not been given paid holiday during his 13 years with the company. He had taken periods of holiday but all of it was unpaid and he did not take his full annual four weeks’ ‘EU holiday’ entitlement in most years. 

When he was retired from the company, Mr King brought a number of claims against his former employer, including one for holiday pay in respect of untaken holiday. 

Mr King was held by the Employment Tribunal to be a ‘worker’ (under section 230(3) of the Employment Rights Act and regulation 2 of the Working Time Regulations). During his 13 years with the Sash Window Workshop, Mr King had therefore been entitled to paid annual leave in accordance with regulations 13 and 13A of the Working Time Regulations. The key question in the case was whether Mr King’s untaken entitlement to annual leave should, under EU law, be allowed to roll over each year and accumulate. 

Mr King’s claim for holiday pay progressed to the Court of Appeal, which referred a number of questions to the ECJ – these questions related to Mr King’s untaken holiday entitlement. 

The ECJ’s answers to the key questions 

• The ECJ was asked to consider whether, if a worker does not take all or some of the holiday to which he is entitled in the relevant holiday year, in circumstances where he would have done so but for the fact that the employer refused to give him paid holiday, that worker could claim that he has been prevented from exercising his right to paid holiday so that his paid holiday entitlement rolls over from one year to the next until he has the opportunity to take it. 

The ECJ decided that he could. A ‘worker’ who is not allowed paid holiday may roll over his untaken holiday entitlement from one year to the next. The ECJ also decided that there should be no limit on the number of years’ holiday to which this rollover could apply. The rollover should, however, only apply to the four weeks of ‘EU holiday’.

• The ECJ then asked itself whether Article 7 of the Working Time Directive (which provides that every worker is entitled to four weeks’ paid annual leave) precludes any national law which prevents a worker in Mr King’s situation from carrying over and, where appropriate, accumulating untaken paid holiday rights until the termination of the employment relationship. 

The ECJ held that it does. Under the Working Time Regulations, statutory holiday cannot be carried over from one year to the next (except where a worker is on sick leave and unable to take their holiday) – regulation 13(9). The ECJ judgment means that Article 7 will stop regulation 13(9) from preventing the rollover of untaken paid holiday entitlement from one year to the next where a ‘worker’ has not been granted paid holiday by their employer.

What remedy will be available to Mr King to recover the unpaid holiday? 

The case will now return to the Court of Appeal for judgment. But, what is the route by which Mr King can recover the paid holiday to which he was entitled? 

Holiday pay claims are usually brought (as was the case here) as a claim for a series of unlawful deductions from wages – this tends to allow a claimant to back claim in respect of a longer period than would be the case with a Working Time Regulations claim. 

A two year cap on unlawful deduction from wages claims was introduced by the Government in 2014 in response to the significant impact of the Bear Scotland holiday pay/overtime case on UK businesses. This cap does not apply to Mr King as he brought his claim before the cap came into force. His claim is for a series of unlawful deductions – in order to claim for his full holiday entitlement in this type of claim he will need to show that there is no gap longer than three months between the deductions in the series over the 13 year period (this ‘no more than three months gap’ requirement was set down by the EAT in Bear Scotland) – this may be difficult to do given that Mr King did not actually take the leave and so it is not clear when the ‘deduction’ occurred. 

The ECJ judgment that Article 7 of the Working Time Directive precludes any national law which prevents a worker in Mr King’s situation from carrying over untaken holiday may lead the Court of Appeal to conclude that it should overrule the ‘no more than three months gap’ requirement on the basis that this requirement is incompatible with EU law – it effectively prevents Mr King from recovering his full loss. Whether it would overrule it in all cases, or specifically in cases where a 'worker' who was not given paid holiday by their employer has a claim for untaken holiday, is not clear. 

The Court of Appeal may also comment, on a obiter basis, on the lawfulness of the two year cap on holiday pay claims of this type. In any event, there might be a challenge to the two year cap in the near future in respect of claims for untaken holiday by ‘workers’ who were not granted paid holiday by their employers – such a claim would allege that the relevant legislation (section 23(4A) of the Employment Rights Act) is incompatible with EU law in that it prevents a worker in Mr King’s situation from having a means to recover his rolled over untaken holiday. 

If the Court of Appeal did not wish to overrule the ‘no more than three months gap’ requirement set down by Bear Scotland or to raise a question as to the validity of the two year cap, it could potentially take a different route. On termination of employment, a worker is entitled under regulation 14(2) of the Working Time Regulations to a payment in respect of untaken but accrued holiday during the last year of employment. Under regulation 30(1), a worker may bring a claim for any amount which is unpaid but due under regulation 14(2). 

The Court of Appeal has recently commented (in NHS Leeds v Larner [2012]; on a obiter basis) in a case relating to untaken paid holiday entitlement on sick leave that regulation 14 could be read and interpreted (to comply with Article 7) to include a provision requiring the employer to make a payment on termination in respect of any untaken holiday from a previous holiday year which was rolled over due to sickness. It could adopt a similar interpretation here – by including a provision in regulation 14 entitling a worker to a payment on termination in respect of rolled over untaken paid holiday entitlement from a previous holiday year where an employer has not made paid leave available to the worker. 

Mr King could then bring a claim for non-payment of the amount due under regulation 30(1). He would be out of time to make such a claim but it seems likely, if the Court of Appeal chose to take this route, that an extension of time would be granted to him on grounds that it was not reasonably practicable for him to present the claim within the applicable three month time limit.

What does this mean for employers? 

This case only relates to untaken holiday entitlement where paid holiday should have been made available to workers but was not. It does not apply to unpaid holiday which was taken – this would form the basis of an unlawful deduction from wages claim to which the two year cap should apply. Businesses may wish to review their records to determine whether they are at risk of similar claims.