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Paid leave – getting it right

Last week [8 June], the European Court of Justice (ECJ) passed a ruling reinforcing workers’ rights to paid holiday entitlement, clarifying that employers must give workers the ability to take paid holiday during their employment or risk substantial back-pay claims.  

The decision was made following the case of a UK-based window salesman who was dismissed at the age of 65.

The commission-based salesman, Mr King, had worked for Sash Windows on a self-employed basis for 13 years. Though he had previously been offered an employment contract, including paid holiday, he declined the offer.

On the understanding that Mr King was self-employed, Sash Windows did not pay him for any holidays taken, resulting in him taking less annual leave per year compared to the statutory entitlement because he could not afford to take any more.

After being dismissed, Mr King pursued a claim against Sash Windows, which led to an Employment Tribunal finding that he was a “worker”.

The Tribunal subsequently awarded him his accrued holiday pay for the current year, payment for his unpaid holiday pay for previous years and, controversially, payment in lieu of untaken leave that he said had accrued in previous years.

The Tribunal drew a surprising comparison between a worker being unable to take paid leave due to sickness and a worker being denied paid leave. It found that both should be entitled to the same degree of protection to carry forward their holiday entitlements or be paid in lieu on termination.

This case is an example of one of many recent legal battles involving businesses operating in the so-called ‘gig economy’, a fast-growing sector where an increasing number of employers are getting caught out where workers rights and benefits are concerned.

So how can businesses operating under similar employment practices protect themselves?

1. Correctly categorise your staff

In light of the expanding gig economy, and following the recent judgments faced by Uber, Cityprint and now Sash Windows, it’s increasingly important to understand the distinction between a self-employed individual, a worker and an employee.

An employee is a person employed under a contract of employment, a worker is a person engaged under a contract for services and a self-employed individual is engaged under a contract for services and takes responsibility for their own business dealings and tax.

It is important to treat each accordingly and ensure their contractual arrangements reflect the reality of their employment.  

The distinction between ‘worker’ and ‘self-employed’ is becoming increasingly challenged due to the associated tax implications and employment-related benefits that are afforded to workers only. In particular, workers are entitled to paid annual leave, in accordance with the Working Time Regulations 1998, the national minimum wage and/or national living wage and protection under discrimination legislation, all rights that are not afforded to the self-employed.

While most employers have good intentions when taking on individuals on a self-employed basis, unless this status reflects the true reality of the engagement it will be open to challenge. Therefore, to avoid any claims, employers should undertake a detailed analysis of how the services will be performed to ensure the individual is on the right status and afforded all associated benefits and protections. Such arrangements should also be regularly reviewed to ensure the contractual arrangements are kept up to date.

2. Ensure all workers are given the opportunity to take paid annual leave

Sash Windows found themselves in difficultly because they failed to provide a facility for Mr King to take paid annual leave. Employers should therefore ensure workers are given the opportunity to take paid leave during their engagement and this is managed in a comparable way to employees.

A full-time employee/worker is entitled to at least 5.6 weeks paid holiday per year, including the usual public and bank holidays in England and Wales. This calculation can be reduced on a pro-rata basis for individuals who work less than a full-time equivalent

Workers/employees are entitled to a ‘week’s pay’ for each week of leave they take.

A week’s pay is worked out according to the kind of hours someone works and how they’re paid for the hours. This includes full-time, part-time and casual workers.

What constitutes a ‘week’s pay’ should include any payments that are linked to the performance of their work. This should include regular payments received for compulsory and non-guaranteed overtime, commission payments, allowances, guaranteed bonuses etc.

Different calculations will apply to individuals who work different work patterns.

3. When can a worker make a claim about holiday pay?

The ECJ’s recent judgment in King v Sash Windows has unfortunately confused the answer to this question. Before this case, UK law limited holiday pay claims to two years back pay and prevented an employee from pursuing a claim where there had been a series of deductions broken by more than three months. As such, if the CJEU follows the Attorney General’s opinion in King, will the UK’s restriction now be incompatible with the ECJ’s most recent decision? This is an area that will now need to be clarified.


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