Getting holiday pay and holiday entitlement right can be a minefield for any employer. Here we look at the recent Court of Appeal decision in the case of Smith v Pimlico Plumbers which all businesses that engage contractors need to be mindful of.
1. What are the current holiday entitlements?
Workers are entitled to 5.6 weeks' paid holiday per year under the Working Time Regulations 1998 (“WTR”), made up of four weeks’ leave derived from the Working Time Directive (“WTD”) and an additional 1.6 weeks' leave under the WTR. WTD leave can only be carried over from one year to the next in limited circumstances, namely where a worker is prevented from taking holiday due to sickness or family-related leave. The genuinely self-employed are not entitled to paid holiday but employment status is a complex issue and sometimes individuals who have been treated as self-employed are later found by a tribunal to be workers (or employees) and therefore entitled to paid holiday.
2. What is the case of Smith v Pimlico Plumbers Ltd about?
Mr Smith worked for Pimlico Plumbers for six years and the company regarded him as being self-employed. In 2018, Mr Smith challenged this status and was found by the courts to be a worker. This meant that he was entitled to holiday pay. Throughout his time with the company, Mr Smith had taken days off but had not been paid for any of them. He brought a claim for holiday pay going back to the beginning of his engagement by Pimlico Plumbers in 2005.
3. What was decided?
The Court of Appeal held that Mr Smith was entitled to payment for all unpaid holiday relating to the four weeks’ WTD leave, for every year he had worked for Pimlico Plumbers, i.e. from 25 August 2005 to 3 May 2011.
Applying the principles set down by the European Court of Justice in the 2017 case of King v The Sash Window Workshop, the Court of Appeal decided that workers who were denied the opportunity to take their WTD leave can accumulate it and carry it over to subsequent years, and they are entitled to a payment in lieu on termination. This principle is to be applied regardless of whether the worker took leave days (that were unpaid), or took no days off. The two-year back-stop on unlawful deductions from wages is not relevant when claims are brought under the WTR, and the worker has three months from their termination date to bring a claim.
The Court of Appeal said that the right to carry over the leave will only be lost if the employer can show it allowed the worker to take paid annual leave, encouraged them to take it, and informed them that the right would be lost at the end of the leave year.
4. Why was Mr Smith’s claim not out of time?
The Employment Tribunal and the Employment Appeal Tribunal both dismissed Mr Smith’s claim on the basis that it was out of time. They took the view that as his last unpaid period of the holiday was taken in January 2011, he had three months from the date on which he should have received payment for that holiday (i.e. 5 February 2011) to bring his claim. Mr Smith appealed to the Court of Appeal and successfully argued that because he was entitled to a backdated payment for all of the unpaid leave derived from the WTD up to the point of termination, his time for bringing his claim ran from the termination date.
5. What does this mean for employers?
Although this case only concerns the right to the first four weeks of paid annual leave under WTD and not the remaining 1.6 weeks’ paid leave entitlement under the WTR (or any additional contractual leave that an employer may give), the decision is significant for businesses that engage self-employed consultants and contractors on a long term basis, typically in the ‘gig economy.’ Where those individuals can establish that they are workers rather than independent contractors, they may bring claims for holiday pay to recover, on termination of their employment, compensation for four weeks’ WTD leave which they were entitled to for each year of their employment, whether or not they took that leave. If they have been with the company for many years, the sums involved could be significant. Some legal opinion suggests that interest on the unpaid sums would be due.
6. Is there anything specific businesses should do?
Businesses should audit their workforce to identify any potential independent contractors who could claim to be workers and assess any legal risks as a result of this decision. All employers should also have a policy that makes it clear that workers have the opportunity to take paid leave, are encouraged to do so, and understand that the right will be lost at the end of the leave year if it is not taken. If the employer cannot meet that burden, the right to the annual leave does not lapse and the worker is entitled to a payment in respect of the untaken leave at termination.