European court gives greenlight to self-employed salesman pursuing up to 13 years’ holiday back pay
29 November 2017
Employers with large gig or on-demand workforces, particularly where some are pushing for ‘worker’ rights, face more bad news with a judgment from the EU Court of Justice.
The Court decided that ‘workers’ who have been denied paid holiday in the belief that they were self-employed independent contractors can accumulate pay in lieu of holiday from when they start work and can carry it forward for years until their employment is terminated. Employers at risk should now factor this new potential liability in to their business models. This decision also has wider implications for how and when employees and workers are permitted to pursue historic holiday pay liabilities under UK law.
Mr K, a salesman, worked 13 years on a ‘self-employed commission-only contract’ for a window business, SWW Ltd. He was not given paid holiday as SWW Ltd wrongly believed he was not entitled to it. A Tribunal decided that during those 13 years, Mr K had ‘worker’ status and was therefore due holiday back pay for that period.
In UK law, having ‘worker’ status is a passport to a range of employment rights such as the national minimum wage, holiday pay and access to a pension scheme, and has been the focus of the recent Uber claims and the Taylor Review (see more here).
On appeal, SWW Ltd contested Mr K’s entitlement to pay in lieu of accrued but untaken leave (untaken because it would have been unpaid) throughout his whole period of employment. It broadly argued that under a ‘use it or lose it’ principle in law, Mr K had lost the right to annual leave from previous years and was time-barred from bringing a claim. Also, he did not fall under the limited exceptions to that ‘use it or lose it’ principle established by case law (such as those involving sick employees unable to take holiday).
The EAT allowed the appeal. Mr K appealed and the Court of Appeal sought clarification of the applicable EU law from the Court of Justice, in particular:
- whether the right to paid annual leave was extinguished where Mr K did not invoke his entitlement until his employment was terminated and where his employer had failed to facilitate him to do so
- the circumstances in which untaken paid leave can be carried over and for how long
The Court of Justice decision
The Court noted that the right to paid annual leave is an important principle of EU law which prohibits Member States from making its very existence subject to any pre-conditions whatsoever or excluding that right.
As such, the Court stated that UK law should not require a worker to take his leave first before being able to claim that it should be paid. Furthermore, where the employer does not allow a worker to exercise his/her right to paid annual leave, UK law should not stop the worker from carrying over untaken paid leave rights until his or her employment is terminated.
Accordingly, where a worker is prevented from exercising his right to a period of leave because the employer refuses to provide holiday pay, the right to paid leave carries over and, upon termination of employment, the worker is entitled to a payment in lieu. This carry forward might continue the entire length of the workers’ engagement – other case law which limits the carry forward to set periods such as 15 months (in circumstances of sickness) does not apply.
This decision results in new potential liabilities when using contractors and gig workers – but only if their employment status is at risk of misclassification.
In practice, businesses should assess the likelihood of such workforce status misclassification (i.e. whether you have genuine independent contractors and freelancers or whether some are in fact ‘workers’ with rights) as a first step. If a misclassification risk is found to exist, consider the appetite for enforcement of any holiday pay rights by such workers. For example, some higher paid or specialist freelancers may be unlikely to pursue claims. Also, are potential ‘workers’ longer-serving? If not, the potential carry forward liabilities are obviously less of an issue. The recent abolition of ET fees will increase the likelihood of claims.
Unfortunately, by providing paid holiday to independent contractors and freelancers, employers make it more likely that such individuals may be considered to be ‘workers’ and therefore entitled to other rights such as the national minimum wage and pension auto-enrolment. Employers should therefore take advice if paying holiday pay is under consideration.
Finally, this decision has broader potential implications in other circumstances involving historic liabilities for holiday pay. For example, where employees and workers have been underpaid holiday pay for many years but are precluded from recovering where there is a three-month break and/or any back pay is capped at two years, reflecting recent overtime and holiday pay litigation. While it is too early to draw firm conclusions as to how this case will be applied to domestic law in such circumstances, employers need to be aware that both the three-month break and the two-year cap on back pay are looking vulnerable in the light of this decision.
For more information please contact Diane Gilhooley or Simon Rice-Birchall.