By Daniel Dyal
In Sash Window Workshop v King theEmployment Appeal Tribunal returned to two of the central controversies in recent holiday pay case-law. Firstly the right to carry annual leave entitlement over from one leave year to the next. Secondly the right to claim back pay for untaken leave in historic leave years, particularly upon the termination of employment.
In this blog Daniel Dyal unpicks what Sash Windows decided, considers some of its implications and suggests an alternative approach to some of the reasoning.
Background law (holiday pay enthusiasts can skip this section!)
By Article 7 of the Working Time Directive workers have a right to four weeks paid annual leave. This is implemented in domestic law principally by regulations 13 and 16 of the Working Time Regulations 1998 (‘WTR’). Regulation 13 purports to implement the right to leave; regulation 16 purports to implement the right to pay for that leave. It is now clear that neither regulation gives full effect to the WTD.
Regulation 13(9) WTR provides that leave may only be taken in the leave year in respect of which it is due (i.e. it cannot be carried over) and cannot be replaced by a payment in lieu save where the worker’s employment is terminated. Where a worker’s contract is terminated then a payment for accrued but untaken leave, in the final leave year, can (and must) be made in accordance with regulation 14 WTR.
EC law entitles those who are prevented by sickness from taking annual leave during a particular leave year to carry that leave over into a subsequent year. This entitlement arises irrespective of whether or not the sick worker made a request to take annual leave whilst on sick leave.
In NHS Leeds v Larner  IRLR 825 the Court of Appeal held that in order to give effect to EC law it was necessary to create an exception to regulation 13(9) WTR. This was achieved by reading the following words into that regulation which otherwise prohibits the carry-over of leave: “…save where the worker was unable or unwilling to take it because he was on sick leave and as a consequence did not exercise his right to annual leave”. A corresponding insertion was made to regulation 14 WTR so as to provide that payment in lieu of accrued leave upon termination should include leave which has been carried over from previous leave years in accordance with the insertion to regulation 13(9).
Domestic law makes further provision for an additional 1.6 weeks annual leave by regulation 13A WTR. This additional leave has no basis in EC law whatsoever; it is a purely domestic right. The law in relation to regulation 13 and 13A leave is significantly different. There is no requirement to apply the stringent principles of EC law to regulation 13A leave (see Neidel v Stadt Frankfurt AM Main  IRLR 607).
Regulation 16 is at the heart of the principal holiday pay controversy that is currently occupying employment lawyers. It was modified to give further effect to EC law by the Employment Appeal Tribunal in Bear Scotland v Fulton.
A claim for unpaid holiday pay (whether in breach of regulation 14 or 16 WTR) can be brought pursuant to regulation 30 WTR. It can additionally be brought as a claim for unlawful deduction from wages under the Employment Rights Act 1996 allowing claimants, in principle, to take advantage of the more generous limitation provisions under that act. A repeated failure to pay holiday pay can be a ‘series of deductions’ (HM Revenue & Customs v Stringer  IRLR 677). This may be less generous to claimants than previously thought in light of Fulton v Bear Scotland, according to which a series of deductions is easily broken: a gap of over three months between deductions will break the series.
Mr King was engaged by Sash Windows for some 13 years. During that time he generally took either three or four weeks annual leave per annum. The leave was always unpaid. In the employment tribunal Mr King asserted that he would have taken more annual leave in each of his leave years in accordance with his full entitlement under the WTR if only Sash Windows had been willing to pay for his annual leave. He successfully claimed compensation for both the unpaid leave he had taken and the accrued but untaken annual leave in each leave year of his engagement. Sash Windows appealed against the award of holiday pay in relation to accrued but untaken annual leave.
Decision of the EAT
In order to unpick this decision a distinction needs to be made between two different ways in which an employee in Mr King’s position might seek to recover holiday pay (albeit that the employment tribunal does not appear to have clearly delineated them.)
The carry over argument. Less holiday was taken in each leave year than was accrued; in the special circumstances of the case there was a right to carry the holiday entitlement over from one holiday year to the next despite regulation 13(9); upon termination there was thus a large number of accrued but untaken days of holiday; compensation should be payable in lieu on termination despite what regulation 14 says. The argument is that regulations 13 and 14 must be modified in a Larner type manner to give effect to EC law such that the worker can claim compensation on termination for untaken leave which accrued not only in the final leave year but also in preceding leave years.
The deductions from wages argument. In each leave year Mr King was prevented from taking his full holiday entitlement and as such, in each leave year, he was not paid for his full holiday entitlement. That was a repeated breach of regulation 16 WTR and amounted to a series of deductions from wages. Time ran from the last deduction (which was made on termination) and thus a claim could be made for each deduction.
EAT decision on the ‘carry-over’ argument
The EAT appears to have accepted that there is a more general exception to regulation 13(9), which on its face prevents leave from being carried over, than was identified in Larner. In Larner the Court of Appeal limited the right to carry over holiday entitlement to cases in which sick-leave had prevented the worker from taking holiday. King suggests that, in principle, an employee who is unable or unwilling to take holiday for other reasons which are beyond his control, such as because he will not be paid for his leave so cannot afford to take it, may be entitled to carry-over the holiday entitlement.
However, since the Employment Tribunal made no detailed findings of fact as to whether or not Mr King had been prevented from taking leave for reasons beyond his control, the case was remitted for further consideration.
EAT decision on the deductions argument
The claim that there was a series of unlawful deduction from wages was premised on an argument that there were a number of historic and more recent failures to make a payment for holiday pay. This argument failed in the EAT, baldly, because it did not accept that there is any general right to holiday pay in respect of untaken leave. In other words it did not accept that there is a breach of regulation 16 when an employer refuses to allow an employee to take annual leave to which he is entitled pursuant to regulation 13. There was a complex rationale for this.
Firstly, if indeed it were the case that Mr King had been prevented from taking annual leave, then on the facts, instead of taking annual leave he had worked and been paid for his work. He had already received pay for those periods of time when he should have been on leave; if he now received holiday pay in relation to those self-same periods of time that would be a double payment, i.e. double recovery. Further, as a matter of policy, holiday should be taken rather than replaced by a payment in lieu; if payment in lieu were an available remedy that would be an incentive not to take leave.
Secondly, what Mr King lost was not wages, but the health and welfare benefits of taking annual leave. Since he had not taken the leave, he had not been entitled to pay for it. And since, instead of taking leave, he had worked and been paid for his work, his loss was limited to the lost health and welfare benefits of taking annual leave. This, the EAT held, could only be a claim for unliquidated damages not a claim for a specified sum of money and thus not a claim for wages at all. It could only therefore be brought under reg. 30 WTR and no question of a deduction or a series of deductions in respect of historic leave years could arise.
Thirdly, even if that was wrong, the tribunal had failed to give any proper consideration to whether or not there had actually been a series of deductions. Any future consideration of that question would have to take account of Bear Scotland v Fulton & Others which held that any gap of more than three months between deductions breaks the series.
The EAT’s decision on the carry-over point is an interesting development of the law. It remains to be seen how far this will go and what other types of reason may be relied upon to justify carrying over annual leave from one year to the next. For instance, if the tribunal finds that the worker was simply too busy with work to take his full annual leave entitlement, is that a sufficient reason to entitle the worker to carry over his leave to the next leave year? One can well see this argument being made, particularly by those advising (once busy) senior executives on termination packages.
It is fair to anticipate, however, that employment tribunals and certainly appellate courts will keep this on a relatively short leash. Moreover, it is important to understand the limits of the argument. Even under EC law there is no right to carry over holiday indefinitely even if prevented by ill-health from taking it. Thus in KHS v Schult  ICR D19 the CJEU accepted that annual leave could lawfully be forfeited if not taken within 15 months of the end of the leave year. The EAT expressly noted this in King and indicated it ought to have a bearing on the interpretation given to regulation 13(9).
Thus even if Mr King succeeds in proving that he was prevented from taking annual leave during the currency of his engagement, it is doubtful that he will be able to recover more than one or at best two years of carried over accrued holiday pay pursuant to the carry over argument.
The EAT’s decision on Mr King’s deduction from wages claim is also controversial at least in parts. In essence, in holding that there is no right to payment for annual leave pursuant to regulation 16 WTR if the leave is not in fact taken, King follows the reasoning in Fraser v Southwest London St George’s Mental Health Trust  I.C.R. 403. The opposite view was taken by a different division of the EAT in Canada Life Ltd v Gray  ICR 673 which held that on termination an employee who had not taken his full annual leave entitlement in preceding leave years could claim that there was a series of deductions culminating in a final failure to pay holiday pay on termination. This difference of opinion between divisions of the EAT was not resolved in Larner and remains at large.
The reasoning underpinning the decision in King and Fraser is perhaps not wholly convincing. The first argument is that if payment in lieu were available as a remedy for untaken holiday pay that would create an incentive for the employee not to take holiday and that in turn is to be discouraged. Such an argument is not persuasive in a case in which the employee’s very complaint is that he was prevented by the employer from taking leave. If a payment in lieu is available, but only if, the employee has been prevented by the employer from taking leave, that simply does not create an incentive for the employee to choose to work instead of to take leave.
The second argument, in relation to double recovery, might also be seen as dubious. Double recovery occurs when someone is compensated or remunerated twice for the same thing. An alternative analysis to that taken in Fraser and King is as follows. If the worker is prevented from taking leave and instead has to work when he would have taken leave, then the worker does more work in the leave year than he would have done had he taken his leave. Assuming the worker was paid for that additional work, it is true that if he then receives holiday pay in respect of untaken leave, he ends up with more money in that leave year than he would have had if he had taken and been paid for his leave. However, that does not mean that he is over compensated. It is fully explained by, and reflects, the fact that the worker has done more work than he would have done if he had been allowed to take his leave. To put it differently there is no double recovery because the Claimant is not being remunerated twice for the same thing: he is being remunerated on the one hand for the extra work he has done and on the other for the pay he was quite separately entitled to receive without having to specifically work for it (i.e. holiday pay). If this alternative analysis is correct then the worker does have a liquidated loss, i.e., the lost holiday pay which is amenable to being claimed as wages.
Even if the alternative analysis advanced here is correct, Mr King will still need to show that there was a series of deductions. Although it is all but inevitable that at some stage there will be a case which seeks to challenge the analysis of ‘series of deductions’ in Bear Scotland, it remains to be seen whether Mr King’s case is used as the vehicle to do this.
Finally, for reasons that are unclear, in King the employer drew no distinction between Mr King’s regulation 13 and 13A leave and the case proceeded on the footing that the law applicable to regulation 13 applied to the whole of Mr King’s leave entitlement. Advisors should be aware of the distinction between the two sources of leave. Regulation 13A leave has no EC law underpinning and therefore there is no requirement to read words into it or otherwise interpret it in a particularly ‘worker friendly’ way.