Thousands of former staff of now defunct retail chains Woolworths and Ethel Austin have been told that they will not be receiving compensation for the termination of their jobs when the stores went under.

The European Court of Justice ruled that staff who worked in stores that employed fewer than 20 people would not receive compensation. It means that 3,200 ex-Woolworths workers will miss out. The decision also applies to former employees of out-of-business clothing firm Ethel Austin – of which 1,200 are effected.

UK law dictates that workers who ply their trade in smaller stores do not need to be consulted regarding redundancies and would not be entitled to compensation in the event of being made redundant.

However, the general secretary of Usdaw – the shopworkers' union which has been fighting on behalf of the employees since Woolworths went out of business in 2008 – John Hannett called the verdict a "kick in the teeth".

Hannett said: "This decision marks the end of the road for our members from Woolworths and Ethel Austin seeking justice and they are heartbroken by today's verdict.

"Our case is morally and logically robust, so today's verdict is a kick in the teeth. It is unfair and makes no sense that workers in stores of less than 20 employees were denied compensation, whereas their colleagues in larger stores did qualify for the award. These were mass redundancy situations where one central decision was made to close the whole company down, with no individual analysis of the viability of each store on a case-by-case basis.

"The companies, through their administrators, have already been shown to have acted illegally by failing to consult about the redundancies with the workforce and their trade union Usdaw."