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European court ruling leaves manufacturers wide open to holiday pay claims

The Court of Justice of the European Union (CJEU) has ruled that workers who have not taken paid leave because they have been wrongly treated as self-employed contractors can obtain compensation for all holiday they have accrued – even if this goes back many years.

The decision in King v Sash Windows could impose huge financial burdens on manufacturers who have engaged self-employed contractors who, over time, have morphed into members of staff.

Background

Under the Working Time Regulations 1988 (“WTR’s”), all workers are entitled to 5.6 weeks paid leave per year (pro-rated for part-time staff). Unless they are ill, workers must take their holiday in the holiday year in which it accrues, and they cannot receive a payment in lieu of untaken statutory holiday unless their employment is terminated.

The facts

Mr King worked as a commission-based salesperson for Sash Windows for 13 years. He was offered a contract of employment after seven years, but turned this down and continued to work on a self-employed basis until he was dismissed when he reached the age of 65. In order to bring a claim of age discrimination, he had to argue that he was a “worker” (rather than being self-employed) and, as a result, was also entitled to paid holiday.

Mr King had taken some holiday during his 13 years with the company, but none of this was paid. He argued that he was entitled to receive compensation for the unpaid holiday he had taken, plus a payment in lieu of all 24.5 weeks of untaken holiday that had accrued since the start of his employment.

Sash Windows agreed that if Mr King was a “worker” rather than being self-employed, he was entitled to receive a payment for accrued holiday pay in the current holiday year only, but not payments for previous years as these were time-barred.

Mr King’s case was referred to the European Court to clarify whether workers can claim holiday pay going back a number of years.

CJEU judgment

The court set out very clear principles:

  1. A worker must know that he is going to be paid before he takes leave
  2. Workers have the right to be compensated for untaken and unpaid leave
  3. A worker can carry over and accumulate such untaken leave until the end of their employment relationship, and is not restricted in the same way as workers unable to take holiday due to long-term sickness.

These principles apply even if the employer wrongly believes that the worker is not entitled to paid leave. Employers are under an obligation to correctly determine the status of their workforce, and if they get it wrong they “must bear the consequences”.

The WTRs only provide workers with a remedy if they have taken leave which has not been paid either at the correct rate, or at all. This is incompatible with the Directive.

What happens next?

The case will return to the Court of Appeal in November 2018 to determine if the WTRs can be interpreted to give effect to this decision and, if so, how much compensation Mr King will receive.

It will be interesting to see if Mr King is compensated for untaken holiday at the same rate as applies to the leave he did take which was unpaid. The latter is calculated by reference to his earnings in the 12 weeks before he took the leave. However, there are likely to be arguments put forward about how much he should be paid for his untaken leave.

When the employment appeal tribunal examined this issue, it decided that Mr King was not out of pocket because he had worked rather than had taken holiday, and to pay him for this time would amount to “double recovery”. It held that payment should be limited to an amount to compensate him for loss of enjoyment and welfare benefits rather than it being calculated on the basis of a week’s pay.

This is not an attractive argument. If holiday pay is not calculated in the normal way, this could act as a disincentive to take leave – which, the CJEU has said on numerous occasions, must be discouraged.

Does the two-year limitation on holiday pay claims or three-month gap requirement limit the amount Mr King will receive?

No. Legislation introduced after the recent overtime holiday pay cases limited the length of time a Claimant could go back to claim unlawful deductions to two years, and imposed a requirement that there cannot be gaps of more than three months between underpayments.

However, Sash Windows (and other employers facing similar claims) will not be able to limit their exposure to simply that two-year period. This is because Member States cannot impose limitations on the right to receive paid annual leave until a worker is made aware that he has that right.

Does this apply to all holiday pay a worker is entitled to?

No. In common with other European decisions about holiday pay, it will only apply to the 20 days holiday in each holiday year required under the Working Time Directive, and not the additional eight days holiday provided under the WTR’s (i.e. the UK legislation) or any contractual holiday.

Implications for manufacturers

Businesses engaging individuals on self-employed contracts, in circumstances where they later turn out to be “workers”, will now face huge financial liabilities for holiday pay (and also for underpayments in respect of the National Minimum Wage, as well underpayments in respect of PAYE and NI).

Manufacturers should review the status of anyone engaged as a contractor to make sure that this correctly reflects their relationship. We can help you with this, and have developed a number of strategies to help you minimise liabilities in the event your contractor turns out to be a member of staff. Please contact Joanne Moseley for more details.

Published: April 2018


Focus on Manufacturing - Edition 7

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Jo Moseley