WR Solicitor & Director Jonathan LeachJonathan Leach, Director and Head of Employment Law at Watson Ramsbottom looks at the decision the Court of Justice of the European Union (CJEU) has handed down that could have significant implications regarding a worker’s right to paid annual leave (King v The Sash Window Workshop Limited).

Conley King had worked for The Sash Window Workshop (SWW) as a salesman under a self-employed, commission-only contract from 1 June 1999 until his dismissal at age 65 on 6 October 2012. His contract did not specify whether or not he was entitled to paid holiday leave, and when he did take annual leave, it was unpaid. He had not challenged his employment status and, when offered an employee contract in 2008, he chose to remain self-employed.

After his dismissal, Mr King brought various Employment Tribunal (ET) claims, including that he had been subjected to a series of unlawful deductions from wages because SWW had failed to pay him holiday pay. He claimed that this prevented him from taking his full annual leave entitlement under the Working Time Regulations 1998 (WTR). SWW contended that under Regulation 13(9) of the WTR, leave can only be taken in the leave year in which it is due and cannot be carried forward.

The ET found that Mr King was a worker for the purposes of the WTR and awarded him compensation for unpaid leave that he had taken in previous years as well as for the untaken leave that had accrued year on year. SWW appealed that decision.

The Employment Appeal Tribunal (EAT) was not persuaded that Mr King had been prevented from taking leave, nor did it accept that there is a general right to holiday pay in respect of leave that has not been taken. SWW’s appeal was allowed and the EAT remitted the case for a fresh hearing. Mr King and SWW appealed and cross-appealed the EAT’s decision.

Before the Court of Appeal it was common ground that Mr King was a worker for the purposes of the EU Working Time Directive (WTD) and was therefore entitled to pay in respect of holiday accrued but untaken in his final leave year and for leave actually taken between 1999 and 2012 for which he had received no payment. At issue was whether or not he was entitled to pay in lieu of untaken leave throughout the whole period of his employment. SWW argued that he was not and any claim for payment in lieu of leave not taken in the years in question was time barred. Mr King claimed that he did have the right to pursue his claim where the reason for not taking leave during that period was that his employer had refused to pay him.

The Court of Appeal referred the matter to the CJEU for a preliminary ruling.

The CJEU affirmed that the right to paid annual leave cannot be interpreted restrictively and ruled that a worker does not have to take leave before establishing whether or not they have the right to be paid in respect of that leave.

Furthermore, Article 7 of the WTD must be interpreted in such a way that in situations where a worker has not exercised their right to paid annual leave because their employer refused to remunerate them, the right to that leave carries over until the worker does have the opportunity of exercising it. When the employment comes to an end, the worker is entitled to payment in lieu of all leave that is still outstanding. The decision therefore means that the WTR are incompatible with EU law in such circumstances.

The CJEU found that Mr King did not exercise his right to paid annual leave before his retirement for reasons beyond his control. It dismissed as irrelevant the fact that he had been offered a contract of employment. The case had to be decided on the employment relationship in existence at the time of the claim.

Furthermore, the CJEU found that an employer’s ignorance regarding a worker’s true employment status is no defence for not paying him holiday pay. Whether or not SWW truly believed that Mr King was not entitled to paid annual leave was ‘irrelevant’. It is for the employer ‘to seek all information regarding his obligations in that regard’.

In cases where a worker is on long-term sickness absence and an employer may have difficulty in reorganising the workload, there is a limited carryover period for exercising the right to untaken leave. In this case, however, SWW was able to benefit from the fact that Mr King was not absent from work and ‘an employer that does not allow a worker to exercise his right to paid annual leave must bear the consequences’.

This decision has obvious implications for any business where there are question marks over the employment status of its workforce. Those whose staff successfully claim worker status could potentially be liable to pay a lump sum covering holiday pay for each year of their service all the way back to the introduction of the WTR. However, the ruling only applies to the 20 days’ annual leave entitlement guaranteed under the WTD, not the additional eight days’ entitlement granted under Regulation 13A of the WTR.

Whilst cases on the inclusion in holiday pay of commissions and overtime payments resulted in the Deduction from Wages (Limitation) Regulations 2014, which impose a two-year limit on backdated claims for underpayment of holiday pay, this would not appear to apply in cases where the entitlement to payment of a lump sum in lieu arises on termination of the contractual relationship. Indeed, the Regulations may be challenged as being incompatible with EU law.

Furthermore, the CJEU’s ruling casts doubt on the EAT’s decision in Bear Scotland Limited and Others v Fulton and Others that whilst claims for unlawful deductions from holiday pay are permitted within a three-month limitation period as laid down by the Employment Rights Act 1996, a ‘series’ of deductions is broken if there is a gap of more than three months between non-payments. This effectively put a limit on any retrospective liability on the part of employers, particularly as the EAT ruled that additional leave under Regulation 13A of the WTR should be ‘the last to be agreed upon during the course of a leave year’.

Says Jonathan Leach, Director and Head of Employment at Watson Ramsbottom “We await with interest the return of the case to the Court of Appeal. Meanwhile, we can assist in assessing the potential impact of this decision on your business and advise on mitigating the risks.”

For advice on holiday pay and other employment law matters, please contact Jonathan Leach, Director and Head of Employment Department on 01254 67 22 22 or complete our online enquiry form discuss your concerns with one of our team of expert advisors.

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