ECJ: A worker must be able to carry over paid annual leave when an employer does not allow him to exercise that right

The ECJ held today in King v The Sash Window Workshop that a worker must be able to carry over and accumulate rights to paid annual leave when an employer does not put that worker in a position in which he is able to exercise his right to paid annual leave. EU law precludes the requirement that a worker must actually take leave before establishing whether he has the right to be paid in respect of it. The decision could have a significant impact on the worker status claims currently making their way through the courts.

Mr King worked for The Sash Window Workshop on the basis of a “self-employed commission-only contract” from 1999 until he retired in 2012. When he took annual leave, it was unpaid. Following termination of his contract, Mr King sought to recover payment for his annual leave, both taken and not paid and accrued but not taken, for the entire period of his engagement. The Employment Tribunal found that Mr King was a worker and that he was entitled to payment in lieu of leave. On appeal, the Court of Appeal made a reference to the ECJ asking whether, in the case of a dispute between a worker and employer as to whether the worker is entitled to annual leave with pay, it is compatible with EU law if the worker has to take leave first before being able to establish whether he is entitled to be paid.

In today’s judgment, the Court notes that the right for every worker to have paid annual leave must be regarded as a particularly important principle of EU law. The purpose of that right is to enable the worker to rest and to enjoy a period of relaxation and leisure. However, a worker faced with circumstances liable to give rise to uncertainty regarding remuneration during the leave period is not able to fully benefit from that leave and such circumstances are liable to dissuade the worker from taking his annual leave. The Court notes that any practice or omission of an employer that might have such a deterrent effect is incompatible with the purpose of the right to paid annual leave.

The right to an effective remedy would not be guaranteed if, in a situation in which the employer grants only unpaid leave to the worker, the worker would be forced to take leave without pay and then bring an action to claim payment for it.

The Working Time Directive therefore precludes a situation in which the worker has to take his leave before establishing whether he has the right to be paid in respect of that leave.

The Court also concluded that EU law precludes national provisions or practices that prevent a worker from carrying over and, where appropriate, accumulating, until termination of his employment relationship, paid annual leave rights not exercised in respect of several consecutive reference periods because his employer refused to remunerate that leave.

The Court referred to its previous case law in the context of  workers who had been prevented from exercising their right to paid annual as a result of their absence from work due to sickness, according to which a worker who has not been able, for reasons beyond his control, to exercise his right to paid annual leave before termination of the employment relationship is entitled to an allowance in lieu. In that context, in order to protect the employer from the risk that a worker will accumulate long periods of absence, and from the difficulties those periods might entail with regard to the organisation of work, the Court found that EU law does not preclude national provisions or practices limiting the accumulation of entitlements to paid annual leave by a carry-over period of 15 months, at the end of which the right is lost.

By contrast, in circumstances such as those in the present case, the Court considered that protection of the employer’s interests is not necessary  The Court therefore found that unlike in a situation of accumulation of entitlement to paid annual leave by a worker who was unfit for work due to sickness, an employer that does not allow a worker to exercise his right to paid annual leave must bear the consequences. The fact that an employer might consider, wrongly, that the worker was not entitled to paid annual leave is irrelevant.

As a result, in the absence of any national statutory provision establishing a limit to the carry-over of leave in accordance with the requirements of EU law, to accept that the worker’s acquired entitlement to paid annual leave could be extinguished would amount to validating conduct by which an employer was unjustly enriched to the detriment of the purpose of that Directive.

The judgment of the ECJ raises the stakes for employers who engage their workforce on a self-employed basis where there is a risk that they will be found to be workers. Where an employer has not made a facility available for workers to be able to take their paid annual leave (for example, where the employer denies the worker is entitled to paid leave), then any leave not taken would carry over to the next leave year, indefinitely, until the employee is permitted to take their accrued paid leave, or until termination. The two-year back pay limit under the Deduction from Wages (Limitation) Regulations 2014 does not apply in that situation as the claim is not for back pay but for payment due on termination.

However, the ECJ’s decision case does not explicitly deal with the situation where the worker has taken leave and not been paid. In such cases the existing rules in UK legislation and case law apply: the non-payment is a deduction, a series of deductions is broken by a three-month gap, and back pay is limited to two years.  There must be a risk, following today’s decision that these UK rules are incompatible with EU law, but it is unlikely that there could be a definitive ruling to that effect before the UK leaves the EU.