· Features

Holiday pay: Beware the incorrect employment status

The possibility of employers facing sizeable claims for unpaid holiday pay from wrongly classified workers has increased

In a decision which will have far reaching consequences for many employers, particularly those operating in the gig economy, the European Court of Justice (ECJ) has ruled that if an employer has not made provision for a worker to take paid holidays, because they wrongly categorised them as self-employed, their minimum holiday entitlement will continue to accrue year-on-year and will carry-over for the entire duration of their engagement. On termination, the worker is then entitled to receive a lump sum payment to compensate them for this untaken holiday. The decision marks a significant increase in the dangers of wrongly classifying a worker as self-employed when they should in fact receive all the legal rights enjoyed by that somewhat elusive middle category of ‘worker.'

Factual background

The claimant, King, worked as a sash windows salesman for 13 years. He was regarded as self-employed and paid on a commission-only basis. The contract was silent on the question of paid holidays and he was not paid on the rare occasions he took time off. After his dismissal, King brought a number of claims, including one for his outstanding holiday pay. The employment tribunal held that King had been wrongly classified by the employer as self-employed – he was in fact a ‘worker’ because he was required to provide personal service and was not running his own business.

The tribunal were satisfied that King had been prevented from taking holiday by the fact that it was unpaid and therefore upheld King’s claim for unpaid holiday pay and ordered that he was entitled to be compensated on termination for the holiday that he had not taken during the previous 13 years. The employer’s appeal was upheld by the Employment Appeal Tribunal (EAT). King appealed that decision and the Court of Appeal referred preliminary questions to the ECJ.

ECJ decision

The ECJ has reinforced its view that the right to a minimum of four weeks’ paid holiday is a fundamental EU right, which cannot be subject to restrictions. The key principles arising from the ECJ’s decision are:

  • Employers must provide workers with an adequate way to take their entitlement to paid holiday;
  • If the employer doesn’t allow the worker to exercise their right to paid holiday, the untaken holiday is carried over and accumulates year-on-year;
  • The worker does not have to actually ‘take’ a period of unpaid holiday to be entitled to accrued holiday pay in this way;
  • EU law precludes national provisions or practices that prevent a worker in this situation from carrying over and accumulating an entitlement to untaken holiday (all the way to termination if necessary).
  • The worker is entitled to a payment in lieu on termination of the total accrued amount of untaken holiday.

What does this mean in practice?

It is really important that employers correctly classify their staff at the outset. Wrongly regarding an individual as self-employed, when they are in fact a ‘worker’, is a risky (and potentially costly) business. King’s case will now return to the Court of Appeal to determine just how much compensation he should receive, but applying the rationale of the ECJ decision means the employer could be facing a bill of up to a whole year’s pay (or 52 weeks’ unpaid holiday pay).

In so far as the minimum EU entitlement to four weeks’ paid holiday per year is concerned, the ECJ’s decision also casts serious doubt over both: (a) the rules introduced in 2015 which limit claims for back-pay to two years; and (b) the EAT’s earlier ruling in the Bear Scotland case that gaps of three months or more between the non-payment of holiday pay render the worker unable to claim in respect of the earlier non-payments. The ECJ’s ruling seems to render both of these restrictions incompatible with the right to paid holiday.

Taken together, this means that the possibility of employers facing sizeable claims from wrongly classified workers for unpaid holiday pay stretching back over several years has increased significantly.

Jeff Middleton is partner and head of employment at Hill Dickinson