Holiday Back Pay Calculation Potentially Spans Entire Engagement

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Overview


The Court of Justice of the European Union has decided, in the case of King v The Sash Window Workshop Ltd, that where an individual has been mis-categorised as self-employed instead of as a worker, then the associated holiday pay compensation must cover loss for all holiday, untaken or unpaid, over the whole of the engagement. This decision could have far-reaching and very expensive consequences for UK employers.

In Depth


Recap of How Far Back Claims for Holiday Pay Can Currently Reach

When the holiday pay furore first arose, employers faced the risk that claims could be brought for compensation spanning back to the inception of the right to paid holiday.

Recognising the danger such claims would pose to business, the UK Government introduced a limit on the period for which workers can claim certain unlawful deductions from wages, including holiday back pay, to the two years immediately preceding the date a claim is submitted to an Employment Tribunal.

In addition, the Employment Appeal Tribunal in the Bear Scotland case decided that only underpayments of holiday pay occurring within three months of each other can form part of a single claim, meaning that workers who took holidays more than three months apart can only claim for the most recent holiday taken. The decision also significantly limited the number of retrospective holiday days in respect of which a worker may claim underpayment.

The Facts of the Case

Mr King was treated as self-employed and, as a result, was not paid for holiday. Any holiday he took was unpaid, and he often would take no holiday at all.

The UK Employment Tribunal found that Mr King was, in fact, a worker and so should have been paid for the 5.6 weeks holiday provided for by the UK Working Time Regulations 1998 (WTR). When the time came to assess how much Mr King should be paid as compensation for that lost opportunity to take paid holiday, the fun really started.

Mr King said that he should be compensated for all of the holiday that he had been unable to take, and that he had taken but not been paid for, over the whole of his engagement with Sash Windows.

Sash Windows sought to limit the amount of compensation by relying on the WTR provision that if holiday is not taken in one holiday year, then it cannot be carried over to the next.

The Decision

Given the Court of Justice’s often-repeated view that the right to paid holiday is fundamental and may not be restricted by the national courts, it is not surprising that it disagreed with Sash Windows.

The Court found that Mr King had been prevented from taking holiday because Sash Windows had denied him the right to take it. It would be inequitable to allow it to benefit from that wrong. As a result, Mr King’s right to paid leave had continued to accrue and was carried over until he could exercise the right to take paid holiday, or until the termination of his engagement.

The WTR provision that holiday may not be carried over between holiday years is not compatible with EU law in circumstances where the individual has been unable to take the holiday for reasons beyond his or her control.

Where such a situation arises because of sickness, the Court of Justice has previously held that national law may limit the period during which holiday accrues. In the United Kingdom, Tribunals have used an 18-month carry-over period for this purpose. The Court of Justice confirmed that restricting unlimited accumulation of holiday is fine in that circumstance, because it is appropriate to take into account the rights of the employer.

In Mr King’s case, however, the putative employer financially benefitted from depriving him of the right to paid leave. It did not matter that Sash Windows genuinely thought that Mr King was self-employed. It was for it to properly assess the situation.

The Court of Justice said that an employer which does not allow a worker to take paid leave “must bear the consequences”. There should be no restriction on the carry-over of holiday where the employer has been unjustly enriched to the detriment of the worker. Strong words.

The Potential Repercussions

The result of this ruling is potentially very significant, as we explained when we reported the Advocate General’s decision. However, it does only relate to the four weeks of core statutory holiday required under the EU Working Time Directive (i.e., not the additional 1.6 weeks mandatory holiday provided for under the WTR).

Those engaged in the gig economy who have succeeded in establishing worker status could now claim holiday pay for both taken but unpaid holiday and untaken holiday, over the whole period of the engagement. The potential cost for affected businesses is staggering. But, of course, this won’t only affect the gig economy.

If your organisation engages any self-employed contractor who is really a worker, then there is clearly the potential for a claim like Mr King’s to be made.

Even if you do pay for holiday, but aren’t paying the proper amount, perhaps because you are not factoring in commission or overtime properly, then you should also take note of the Court of Justice’s focus on the employer’s culpability. If the employer has unjustly enriched itself, then it should not get the benefit of any restriction on the amount of compensation payable. You can certainly see how it could be said that an employer who underpays for holiday is enriching itself in much the same way as if it were not paying at all.

If that is right, then the comfort that employers currently have that underpayment claims are limited to two years’ losses, and even then only to occurrences falling within three months of each other, is misplaced, and those limitations on the workers’ ability to be granted full compensation are incompatible with EU law.

It is no exaggeration to say that this decision could threaten the survival of some businesses. However, taking the opportunity now to review the proper status of arm’s length engagements and the calculation of holiday pay, and to rectify any anomalies, will be the best way of staving off claims.