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Employment

Holiday Pay, Again! – Why The Floodgates May Have Just Reopened

Background

It is not often that employment law makes national headlines, however the case King v Sash Windows Ltd, heard by the European Court of Justice (ECJ) last week, did just that.

Mr King worked for Sash Windows for 13 years as a self-employed salesman. When he reached the age of 65 he was dismissed by the company in line with their internal procedures. As a result of the dismissal, Mr King attempted to bring an age discrimination claim against the company. In order to bring such a claim, however, Mr King would need to prove that he was a worker and not a self-employed contractor as both parties previously believed he had been for the previous 13 years.

During his time with the company Mr King took sporadic annual leave, however as he was classed as self-employed he was never paid for this time. As a result of facing a period without pay, Mr King rarely took holidays. In addition to the age discrimination claim, Mr King therefore brought claims for the holiday pay which is required to be paid to workers.

Mr King’s claims were initially successful in the Employment Tribunal, but were overturned by the Employment Appeal Tribunal. Mr King then appealed to the Court of Appeal who decided that they should seek clarification from the ECJ on the thorny issue of holiday pay. The Court of Appeal asked the ECJ a number questions, the key ones of which were:

  1. Does a worker physically need to take annual leave before they can bring a claim in respect of not being paid for that leave?

  2. Where an employer does not provide paid leave, and therefore effectively dissuades the worker from taking leave, should the leave be allowed to roll over and if so how long for?

The ECJ responded to the Court of Appeal’s questions in no uncertain terms. The judgment made it clear that where a worker is not sure whether he will be paid for annual leave it would be wrong to require the individual to take the time unpaid and seek recourse through the courts or tribunal system. Therefore, it ruled that there cannot be a requirement that the annual leave is taken unpaid before a claim can be initiated.

With regards to the point on carry over of annual leave, the ECJ were quick to differentiate Mr King’s scenario from the current strand of case law where a worker is unable to take their annual leave owing to sickness. In that scenario, the Court ruled that it was correct to implement an 18 month back-stop on claims as there needed to be some certainty for employers. In Mr King’s scenario, it was the employer who has the responsibility of implementing the correct legal test for workers and therefore they should “bear the consequences”. As a result the ECJ ruled that holiday pay, in scenarios such as this case, could have an unlimited carry over until the date of termination. In this case, Mr King would therefore effectively be owed 13 years of statutory holiday pay.

This judgment has a number of ramifications in respect of UK law. The two points above conflict with our own Working Time Regulations 1998 which state that a worker must take annual leave and then attempt to claim payment for it if they have not been paid for it. In addition, it is likely that the two year backstop on holiday pay claims, implemented by the Deductions from Wages (Limitation) Regulations 2014, will now also be incompatible with European law.

Further, questions must now be asked of the Bear Scotland Ltd v Fulton case which stated that when considering how far back claims for holiday pay can go, a three month gap in a series of deductions breaks the series. This is now open to challenge given the judgment in King.

The case will give the directors of “gig-economy” companies nightmares for the foreseeable future. Uber is facing potentially thousands of claims from their drivers who the courts have ruled are workers and not self-employed. Should Uber’s appeal be unsuccessful, they will have to pay those drivers back pay to when they first started their engagement with Uber. With the first London Uber drivers having been on the books since 2012, the back pay will be a significant figure.

It should be noted that this case relates only to the twenty days annual leave available under European law and does not extend to the extra eight days holiday we provide for in the UK.

What should you be doing now?

We have commented before on the risks of getting the employment status of an individual wrong. This case has now taken the potential financial liability for employers to the next level.

Employers should urgently do a thorough review of all “self-employed” individuals to ensure that they are satisfied that they are indeed self-employed and not workers. It is important to note that the Courts and Tribunals look further than what is simply stated in a contract and instead will look at the reality of what is done in practice.

What does this mean for you or your business?

It is essential that your business is alert to any potential claims that may arise from individuals who may have been wrongly classified. As shown above, compensation in respect of holiday pay can accumulate to a significant sum.  Financial Directors should be aware of this when preparing budget reports.

Recommended Reading
ACAS have produced guidance to help employers identify employment status which can be found HERE.

As always, should you be concerned that your company may be at risk of misclassification of employment status, we recommend seeking legal advice as soon as possible.

 

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.

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