Has a new window opened on historical holiday pay claims?

This a revised article initially written by Matthew Bradbury in February 2018 after the European Court of Justice ruling in King v Sash Windows. The law has since been developed by the UK Court of Appeal in the case of Smith v Pimlico Plumbers, heard in December 2021, and codified in legislation in January 2024. Revisions done by Lisa Crivello.

Updated January 2024

Background

In 1996, the European Union’s Working Time Directive (the Directive) came into force. It had as its focus the health and safety of workers, which was to be achieved by ensuring a better work/life balance, placing limits on the working week and requiring member states to legislate to provide daily and weekly rest breaks and a minimum amount of paid holiday. In fact, the right to be paid for holidays is a secondary mechanism for ensuring that workers will take holiday, because holiday pay means that they can afford to do so.

The UK government of the time opposed the introduction of the Directive and delayed implementation until 1998 when the Working Time Regulations (WTR) eventually came into effect. This article looks at how subsequent European case law has modified the interpretation of the Working Time Regulations to facilitate the enforcement of accrued holiday rights.

Statutory rights to take paid holiday in the UK

The Regulations initially gave UK workers the four weeks’ paid holiday required under the Directive, but later added a further 1.6 weeks which corresponds to the 8 annual UK bank and public holidays. This additional 1.6 weeks is specific to the UK and so any decision by the European Court of Justice (CJEU) relating to the correct interpretation of the Regulations applies only to the original four-week entitlement afforded by the EU Directive.

Enforcing holiday rights

The Regulations appear to establish two separate rights, the right to take leave (Reg 13) and the right to be paid for that leave (Reg 16). Different time limits apply depending on which ‘right’ is being enforced:

• If a worker makes a request for holiday and it is refused by the employer for a reason that is not permitted, the worker must issue a claim to a tribunal within three months of the first day when they would have taken holiday if their employer had not refused it. This claim is brought under Reg 30 (4) of the Regulations, and the Tribunal can award such compensation as it considers ‘just and equitable having regard to any loss sustained’.
• If the worker is allowed to take holiday but is not paid for it, the claim must be brought within three months of the date they should have received their holiday pay. A claim for holiday pay, as opposed to the right to have holiday at all, can be brought under Reg 30 of the Regulations, or as an unlawful deductions of wages claim in breach of s13 Employment Rights Act 1996. The tribunal will award the amount of holiday pay which was unpaid.

Regulation 13(9) provides that holiday must be taken in the leave year in which it falls due, creating an apparent ‘use it or lose it’ rule. Therefore, under a strict interpretation of the Regulations, if the worker does not claim their holiday in the year when it falls, or fails to take action when it is refused, that holiday, and consequently the pay attached to that holiday, is lost forever. (Note, the Regulations were amended in 2020 to allow some carry over specifically in relation to holiday not taken due to covid-19, but that has now been revoked).

Development of European Case law

There has also been a steady series of rulings in the CJEU that have modified the effect of the UK legislation, creating specific exceptions to the ‘use it or lose it’ rule where workers were unable to take their holiday due to long-term sick leave, or maternity leave. In these cases the CJEU ruled that holiday could be carried over but had to be used within the following 18 months (or 1 year in the case of maternity leave). The method of calculating holiday pay was also modified to include payments in addition to basic pay, such as supplements and allowances, regular overtime, and certain commission payments

UK employees also found another way of getting round the restrictive time limits in the Regulations by using s23 (3) of the Employment Rights Act. This allows claims for backdated holiday as a ‘series’ of underpayments, and the claim only has to be brought within 3 months of the last in the series. So, for example, a worker who was underpaid for their holiday on several occasions, could bring a claim linking those underpayments as a ‘series’. The claim could then be brought using the most recent time limit. S23 obviously then became the preferred method of claiming historical holiday pay claims if earlier time limits had been missed.

Closing the s23 ‘Loophole’

Because of these decisions, employers found themselves facing claims for historical underpayment of holiday pay going back, in theory, to 1996. In order to limit their effect, the UK government introduced the Deduction from Wages (Limitation) Regulations 2014 (the 2014 Regulations), which limited all claims based on a series of deductions to the period of two years preceding the date of issue of claim.

For ordinary ‘wages’ claims, or underpayment of the National Minimum Wage, this is not such a huge barrier to justice, because at least those claims can be brought in the alternative as claims for breach of contract going back six years, in the county court. However, the 2014 Deductions from Wages Regulations also expressly legislated that the right to paid holiday was a statutory right and could not be litigated as a breach of contract claim.

In addition, in Fulton v Bear Scotland Ltd (“Bear Scotland”) the Employment Appeal Tribunal ruled that, if there was a break of three months or more between two periods of unpaid or underpaid holiday, that gap would sever the series of deductions and exclude any periods prior to the break. This decision was confirmed by the Court of Appeal in British Gas Trading Ltd v Lock.

The effect of these developments in the UK meant that:

• Claims for underpayment of holiday pay could only be taken as a series of deductions back to the two years before the date of issue of claim, or to a break between the series of deductions of three months or more, whichever was most recent.
• Claims based on a failure to afford a worker any holiday entitlement whatsoever, paid or unpaid, could not go further back than the beginning of the current leave year except in cases where maternity leave ran across more than one leave year, or during long-term sick leave, and then only for 18 months.

King v Sash Windows

In 2018 however, the CJEU made it clear that limitations placed on holidays and holiday pay claims under the Working Time Regulations 1998 (the Regulations) do not provide UK workers with sufficient entitlement to their European Union (EU) rights. In the case of King v Sash Windows (“Sash”) the Claimant had been told he was self-employed and was paid on a commission only basis from 1999 until he retired in 2012. He then challenged his employment status and claimed payment for annual leave back to 1999, both for that which he had taken and not been paid, and for that which he had not taken, on the basis that he had always been a ‘worker’.

The tribunal held that Mr King was a worker, and awarded him:

a) Pay for holiday accrued but untaken in his final leave year of employment (this was uncontroversial).

b) Pay for holiday taken but not paid between 1999 and 2012 (this was uncontroversial because it was before the 2014 Regulations, which would have limited his claim to the previous two years, had been introduced).

c) Pay in lieu of holiday he had accrued but not taken during his whole employment, a total of 24.15 weeks. This was particularly controversial because of the ‘use it or lose it’ provision in the Working Time Regulations.

Sash appealed to the Employment Appeal Tribunal and the tribunal’s decision was overturned. An appeal and cross appeal went to the Court of Appeal, by which time King’s ‘worker’ status and his entitlement to holiday pay under (a) and (b) above were accepted.

In regard to accruing untaken annual leave, Sash Windows argued that by failing to bring actions in the relevant leave years, Mr King lost all entitlement, since a claim for payment in lieu of those years was issued out of time. King argued that paid holiday should be treated as carrying over from one leave year to the next, because he was prevented from taking it as he would have lost wages. The Court of Appeal referred a series of questions to the CJEU, to which it responded with the following rulings.

• Where an employer disputes the entitlement to paid holiday, a worker does not have to take unpaid leave in order to be able to test their entitlement in court; this will dissuade workers from taking holiday at all as they would have to lose wages.
• Under the Directive, and therefore UK law, a worker does not lose their right to accrue paid leave when they had been prevented from taking it due to reasons beyond their control and the worker is therefore entitled to pay in lieu of all of the untaken holiday on termination of employment.
• The fact that Sash considered King, wrongly, to be self-employed was not a defence. The onus was on the employer to seek all information regarding its statutory obligations to provide its workers with the right to paid leave. Therefore, ‘if it were to be accepted, in that context, that the worker’s acquired entitlement to paid annual leave could be extinguished, that would amount to validating conduct by which an employer was unjustly enriched to the detriment of the very purpose of that directive, which is that there should be due regard for workers’ health’.

The implications of the CJEU’s decision in King v Sash Windows

This case established that where employers have prevented their workers from taking their full entitlement to statutory holiday, that entitlement will carry over into subsequent leave years despite regulation 13(9) WTR. It continues to accumulate until termination of employment, at which point it all becomes payable; hence, time for issuing a claim runs from the date of termination of employment, avoiding any limitation issues posed by the 2014 Regulations.

But for those who have taken holiday but either not been paid at all or been paid incorrectly, the position is more complex. The CJEU’s ruling in King did not address these points, since King left his employment and issued his claim under s23 of the Employment Rights Act, before the 2014 Regulations had been introduced or Bear Scotland decided. It was thought that underpayments for holiday actually taken did not accrue in the same way, and could only be brought within the time limits specified in the Regulations or as a series of deductions under S23 ERA — with all the accompanying restrictions.

This all changed in February 2022 when the Court of Appeal published their decision in the case of Smith v Pimlico Plumbers, holding that the principles in King v Sash Windows applied equally to cases where a worker had been forced to take unpaid leave.

Plugging the gaps — Smith v Pimlico Plumbers

Mr Smith worked as a plumber and like Mr King, was told he was self-employed. Unlike Mr King, he did routinely take unpaid holidays throughout his 6 year engagement with the company, and when he left in 2011, brought tribunal proceedings asserting, amongst other things, that he had the status of ‘worker’ under the Working Time Regulations. He claimed substantial compensation for unpaid leave taken over the years. The preliminary issue of his employment status went all the way up to the Supreme Court who found he was indeed a ‘worker’ and referred the case back to the Tribunal to consider the substantive claims.

The Tribunal found Mr Smith’s holiday claim out of time as the 3 months would run from the date his latest holiday should have been paid in January 2011 (instead of the date he left the Company in May 2011). This was reaffirmed by the EAT who held that the King case only applied to the accrual of untaken holiday, not holiday taken but unpaid.

The Court of Appeal however disagreed, their reasoning summarised in paragraph 102 of Lady Justice Laing’s Judgment:

“In conclusion, in my judgment the appeal should succeed. The language of article 7(1), article 31 of the Charter, and King, establishes that the single composite right which is protected is the right to “paid annual leave”, for the reasons given above. 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. Although domestic legislation can provide for the loss of the right at the end of each leave year, to lose it, the worker must actually have had the opportunity to exercise the right conferred by the WTD. A worker can only lose the right to take leave at the end of the leave year (in a case where the right is disputed and the employer refuses to remunerate it) 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. 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 a payment in respect of the untaken leave.”

Update as of January 2024 — new legislation

Post Brexit, the binding nature of historical EU case law on UK Court decisions had been subject to considerable uncertainty. However, in January 2024 the Government published regulations to amend the Working Time Regulations so that they are now in line with the key CJEU judgments on the carry over of statutory holiday entitlement. (In fact, the Amendment Regulations go much further than this in that they introduce a new category of ‘irregular hours’ worker, with different methods of calculating paid annual leave, but that is beyond the remit of this article.)

In relation to carry over of annual leave, the position is summarised in the Government guidance available on Gov.UK:

• Workers who have not been able to take some or all of their 5.6 weeks’ statutory annual leave due to taking statutory family-related leave (maternity, parental, adoption etc) they may carry it forward into the following leave year.
• Workers who have not been able to take some or all of their basic (4 weeks) annual leave due to being sick, can carry it forward for 18 months from the start of the following leave year.
• Workers who have been told they are not legally entitled to statutory annual leave, or who have been prevented or dissuaded from taking any or all of their basic (4 weeks) statutory leave by the employer, or been refused payment for it, can carry that leave forward indefinitely until it is used up.
• Any leave outstanding for any of the above reasons at the termination of employment becomes payable in lieu.
• The amendment allowing carry over relating to Covid has been revoked.

After leaving employment, a claim for compensation can be brought for untaken leave in breach of Regulation 13 WTR and/or shortfalls of pay under Regulation 16 WTR, as long as these claims are lodged within 3 months of the termination date.

Breaches of Reg 16 can also be brought as a ‘deduction of wages claim’ under s23 ERA 1996, because the date of termination creates a single date for payment of all historical outstanding leave, triggering limitation for tribunal claims. Therefore the individual dates of each unpaid holiday become irrelevant.

Is everything now resolved?

It is not quite the end of the story. It is still the case that payment in lieu of leave cannot be made in respect of the 4 weeks’ leave under Regulation 13, although the situation may be different for the additional leave in 13A.

Lisa Crivello is an employment expert in the Expert Advice Team at Citizens Advice.

The information in this article is correct as of the date of publication.

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