Good news for employee backdated holiday pay claims

In King v The Sash Window Workshop Ltd and anor, the European Court of Justice has held that the means of enforcing the right to paid holiday under the Working Time Regulations 1998 SI 1998/1833 is incompatible with the EU Working Time Directive (No.2003/88). On the EAT’s interpretation of Regs 13 and 16, where an employer grants only unpaid leave to a worker, the worker would be obliged to take leave without pay and then bring an action to claim payment for it. This result is incompatible with the right to paid annual leave under Article 7 read with the right to an effective remedy under Article 47 of the EU Charter of Fundamental Rights. The ECJ also held that, where the employer refuses to pay for annual leave, the worker’s holiday rights carry over until the termination of employment.

K worked for SWW Ltd as a self-employed commission-only salesman from June 1999. He was offered an employment contract in 2008, which included the right to paid annual leave. However, he elected to remain self-employed (under a contract that was silent on the issue). While K did take some holiday throughout his years of service, he was never paid for this. When SWW Ltd terminated his engagement in October 2012, K successfully claimed holiday pay before an employment tribunal, which accepted that he was a ‘worker’ for the purposes of the Working Time Regulations 1998. Among other things, the tribunal awarded him pay in lieu of annual leave accrued but not taken during previous years, also claimed as a series of deductions. The EAT allowed SWW Ltd’s appeal on this issue, holding that the tribunal had failed to make findings of fact to support its conclusion that K was prevented from taking his annual leave for reasons beyond his control. There was therefore no basis for departing from the usual position under Reg 13 that entitlement to leave expires at the end of the relevant leave year. K appealed to the Court of Appeal, which made a reference to the ECJ, querying whether Reg 13 is consistent with the right to paid annual leave under Article 7 of the Working Time Directive, given that (on the logic of the EAT’s analysis) the worker would first have to take unpaid leave before testing his or her entitlement to pay. It also sought clarification of the extent to which untaken paid leave can be carried over, for the purpose of claiming a payment in lieu of untaken holiday upon termination of employment under Article 7(2) of the Directive.

Advocate General Tanchev gave the opinion that employers are bound to provide an ‘adequate facility’ for workers to exercise the right to paid annual leave under Article 7, such as in the form of specific contractual terms or the establishment of a legally enforceable administrative procedure. Where no such adequate facility has been made available, any reference and carry-over periods that would otherwise fall within a Member State’s discretion must necessarily be disapplied. In such a case, the worker would be entitled on termination of employment to payment in lieu of annual leave untaken up until the date on which an adequate facility was made available.

a worker must be entitled to benefit from the remuneration to which he or she is entitled when taking his or her annual leave

The ECJ has now given its judgment and has gone further than the Advocate General. It noted that it was clear from its case law that a worker must be entitled to benefit from the remuneration to which he or she is entitled when taking his or her annual leave. Thus, a worker who is faced with uncertainty as to the level of remuneration to which he or she is entitled during the leave period will not be able to benefit fully from that leave as a period of relaxation and leisure, and is likely to be dissuaded from taking leave in the first place. When seen in that light, the right to paid annual leave cannot, therefore, depend on a factual assessment of the worker’s financial situation when he or she takes leave.

Turning to the Working Time Regulations, the ECJ observed that they implement the right to paid annual leave by way of two separate rights: a right to a period of annual leave under Reg 13 and a right to be paid in respect of that leave under Reg 16. Likewise, Reg 30 provides for two separate judicial remedies. The ECJ noted that, on the EAT’s interpretation of Regs 13, 16 and 30, a worker can claim breach of Reg 13 only to the extent that his or her employer did not permit him or her to take any period of leave, whether paid or not; and can claim payment under Reg 16 only for leave actually taken. This has the effect that, where the employer grants only unpaid leave, a worker is obliged to take leave without pay in the first place and then to bring an action to claim payment for it. The ECJ held that this result was incompatible with Article 7 of the Directive when read with Article 47 of the EU Charter. In K’s particular circumstances, he would be unable to claim after the termination of employment in respect of paid leave due but not taken, which would deprive him of an effective remedy.

As to the accumulation of the right to paid annual leave, the ECJ noted that, in the case of a worker who is prevented from taking paid annual leave due to sickness, case law has permitted national law to limit the worker’s right to carry over that leave to 15 months. That case law took into account not only the protection of workers but also the protection of employers, who might otherwise be faced with the risk that a worker will accumulate periods of absence of too great a length. In contrast, in the present case, there was no requirement to protect the employer’s interests – on the facts, SWW Ltd was not faced with organisational difficulties and indeed was able to benefit from K not taking any paid annual leave. It was irrelevant that SWW Ltd considered, wrongly, that K was not entitled to paid annual leave – it is up to the employer to inform itself of its obligations in this regard and an employer that does not allow a worker to exercise his or her right to paid annual leave must bear the consequences. The ECJ therefore concluded that the Directive requires a worker to be able to carry over and accumulate paid annual leave rights until the termination of his or her employment where those rights have not been exercised over several consecutive reference periods because the employer refused to remunerate that leave.

This case has significant implications for the right to holiday pay in the UK. It suggests that workers who are wrongly classified as self-employed contractors may be able to claim back pay in respect of unpaid annual leave going back many years when their ‘worker’ status is established. It also suggests that the Deduction from Wages (Limitation) Regulations 2014 SI 2014/3322, which limit back pay claims to two years, are incompatible with EU law.

ECJ Judgement – Allowance in lieu of annual leave paid on termination of the employment relationship