Court of Appeal allows claim for six years unpaid holiday by "self-employed"

The Court of Appeal has handed down a significant decision which may in particular lead to retrospective liabilities for organisations engaging individuals on a self-employed basis where the individuals  are able to establish that they are "workers". These individuals may now be able to claim a period of unpaid holiday pay (where holiday has not been taken or has been taken but not paid) stretching back over their engagement. This may be an attractive option for many self-employed workers who have recently seen the tax benefits which come with self-employment erode. 

Organisations involved in other non-standard arrangements (such as umbrella arrangements or arrangements on a zero hour or agency worker basis) who cannot show that they gave workers an opportunity to take paid holiday may also face major retrospective liabilities. Historically many of these workers have tended not to claim for untaken unpaid holiday entitlement on termination given the nature of their engagement, and some umbrella and staffing companies have, until now, been able to treat the unclaimed element as extra profit. 

Background

The Court of Appeal (CA) has handed down a significant decision for employers on the interpretation of regulation 13 of the Working Time Regulations (WTR) which entitles workers to four weeks' paid leave. This regulation was introduced to implement minimum annual leave obligations under the European Working Time Directive (WTD). Separately, in the UK, workers are also entitled to an additional 1.6 weeks' paid leave under regulation 13A WTR.

The decision relates to a claim brought pre-Brexit. However, the terms of the UK's withdrawal agreement with the EU – coupled with the CA's reasoning which draws heavily on pre-Brexit case law from the European Court of Justice – means this decision will continue to have significance for businesses going forwards. 

What was claimed?

The claimant had been engaged by the respondent on a self-employed basis; he had taken periods of leave during this engagement but on an unpaid basis. When the relationship came to an end, the Supreme Court held that he had in fact been engaged as a worker and the claimant therefore claimed unpaid holiday entitlement due to him under the WTR during his engagement. The Employment Tribunal (ET) and Employment Appeal Tribunal (EAT) rejected his claim on the basis that he had in fact taken periods of leave (albeit unpaid) and his claims for non-payment and unauthorised deduction of wages were now out of time. 

In reaching this decision, the ET and EAT distinguished the claimant's case from that in King v Sash Windows in which, following a reference from the CA, the European Court of Justice found that under the WTD, a worker (who had been engaged as a consultant) was entitled to claim unpaid holiday pay stretching back over the course of his engagement in circumstances where he had in fact not taken any holiday.    

What did the Court of Appeal say? 

The CA disagreed with the ET and EAT, holding that the ECJ's decision in Sash Windows rested on principles with a broader reach than the specific facts before it:

• The language of the WTD makes clear that the "single composite right which is protected is the right to 'paid annual leave'". This was supported by ECJ case law with the CA noting that "when" taking annual leave under the WTD, a worker must be able to benefit from the remuneration to which he is entitled to enable him "to rest and to enjoy a period of relaxation and leisure" which is "a particularly important health and safety right guaranteed by the WTD and by the Charter [of Fundamental Rights]. Failure to pay for annual leave or uncertainty about pay is liable to detract from the rest and relaxation that should be afforded by periods of paid leave and to deter workers from taking it".  
• Member States "must not make the very existence of that right… subject to any preconditions whatsoever". A worker faced with "uncertainty about whether he will be paid for leave when taking it was not regarded as being able fully able to benefit from that leave… no evidence of actual deterrence was required". Consequently, if a worker "takes unpaid leave when the employer disputes the right and refuses to pay for the leave, the worker is not exercising the right" as the employer is making the right subject to preconditions. (Our emphasis).
• Domestic legislation can provide for the right to this minimum annual leave to be lost at the end of each year, which is the case under the WTR. However, to lose it the worker must actually have had the opportunity to exercise the right which the CA stated would be "when the employer can meet the burden of showing it specifically and transparently gave the worker the opportunity to take paid annual leave, encouraged the worker to take paid annual leave and informed the worker that the right would be lost at the end of the leave year". (Our emphasis).
• If the employer cannot meet that burden "the right does not lapse but carries over and accumulates until termination of the contract, at which point the worker is entitled to payment in respect of the untaken leave". (Our emphasis).

The CA found that the respondent was unable to discharge the burden of showing specifically and transparently that the claimant had the opportunity during his engagement to take the composite right of four weeks' paid annual leave. The claimant's right to paid holiday pay under regulation 13 WTR did not therefore lapse but was carried over each year, and accumulated until it crystallised on termination of the contract at which point the claimant was entitled to claim in respect of that unpaid leave, which here extended over a period of six years (subject to bringing his claim within the requisite limitation period). The relevant limitation period is three months (or such further period as a tribunal considers reasonable in cases where it is satisfied that it was not reasonably practicable for the complaint to be presented before the end of that three month period). Here, the claimant's contract terminated on 3 May 2011 – a claim for taken but unpaid holiday presented on 1 August 2011 was therefore in time. 

What does this mean for employers and organisations which engage self-employed workers? 

This decision clearly leaves all employers vulnerable to significant holiday pay liabilities where individuals have been incorrectly treated for the purposes of worker rights as being engaged on a self-employed basis. Subject to complying with the applicable limitation periods for bringing claims, these individuals may now exercise their right to claim unpaid holiday pay stretching back over the course of their engagement (with no limit in time), including any periods of holiday actually taken (as well as claims relating to other worker benefits such as sick pay or auto-enrolment for pension purposes). 

This decision will be of concern to organisations which pay individuals on a self-employed basis, including some gig worker platforms and labour suppliers who supply and pay construction workers under the Construction Industry Scheme. It also raises the question of whether PSC contractors might assert rights to holiday pay even if, to do so, would risk calling into question their  pre-April 2021 self-declared outside IR35 tax.

The ruling also has potentially wider ramifications which all employers should note: 

• The CA's decision relies on an obligation on an employer to show specifically and transparently that it has given a worker an opportunity to take paid annual leave, it has encouraged a worker to take that leave and it has informed the worker that the right will be lost at the end of the leave year. While many employers should meet these requirements in respect of their permanent staff, for example through contract terms, holiday policies and day-to-day communications, it would be sensible for employers to check what processes are in place with regards to holiday for all staff working within their organisation.  
• The CA also expressed "a strong provisional view" on the previous holiday pay case of Bear Scotland, in which the EAT held that under the Employment Rights Act 1996 when a claim is made for a series of deductions, that series will be broken when there is a gap of more than three months between the alleged underpayments. This decision has increasingly come under scrutiny with the Northern Ireland Court of Appeal in Agnew stating "as a matter of law" a series is not ended by a gap of more than three months between unlawful deductions. While not strictly required to consider this point, the CA indicated that in its view "Agnew is correct on this point" and "it is a question of fact and degree, based on the evidence, whether deductions are sufficiently similar or related over time to constitute a 'series'". With holiday pay calculations still causing a headache for many employers where pay is made up of variable elements such as overtime, allowances and commission, this analysis will be a cause for concern. 

Employers must now consider the ramifications of this decision in light of their workforce and holiday pay arrangements. The CA was clear in its reasoning that the ball is firmly in the employer's court with all employers required to "set up and maintain a facility to enable paid leave to be taken" coupled with "a duty to establish the correct position; [employers] cannot be allowed to benefit from not paying for annual leave to the detriment of the worker's health and of the purpose of the WTD".

More holiday pay case law, and liability risk, on its way

We are also awaiting major holiday pay case law developments relating to reference periods for holiday pay calculations, which will have a further impact on the potential retrospective liabilities of some employers (especially in umbrella and agency worker situations) for holiday pay. See our last briefing on this.

If you would like to discuss any of these issues further, please do not hesitate to contact the authors or your usual Osborne Clarke contact.