Holiday of a lifetime? How the latest Court of Appeal decision affects you.
3 Feb 2022 |
5 minute read
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Mr Smith first achieved a big win against Pimlico Plumbers in 2018 when the Supreme Court agreed that he was a worker (and not self-employed) and was entitled to paid holiday. Having established he was entitled to paid holiday, Mr Smith then started a long battle through the Tribunal, the Employment Appeal Tribunal and the Court of Appeal to establish what holiday pay he was actually entitled to, having taken unpaid holiday throughout each of the 6 years that he was engaged by Pimlico Plumbers.
Mr Smith worked as a heating engineer for Pimlico Plumbers between 2005 and 2011. Whilst working for Pimlico, they did not pay him holiday as he was engaged on a self-employed basis. Mr Smith still took period of annual leave but did so without being paid for those holidays.
This was a 2017 case determined by the Court of Justice in the European Union (the ‘CJEU’, which is binding in principle on UK courts). In that case, a salesman was never offered paid holiday and never asserted the right to it whilst working for the business because they treated him as though he was self-employed. He later established that he had worker status and the CJEU agreed that the statutory 4 weeks of Working Time Directive paid holiday (‘Euro Leave’) that he was not offered accrued during the whole period of his engagement with Sash Windows
The Court of Appeal established that because the Euro Leave holiday that Mr Smith had chosen to take each year was completely unpaid, it was not lost at the end of each leave year (as would ordinarily be the case under the Working Time Regulations). Instead, because he was not paid for his leave, the 4 weeks Euro Leave carried over indefinitely each year and accumulated until the termination of his engagement. This meant he could bring a claim for 4 weeks' holiday pay for each year of his 6 year engagement and was in time to do so as he brought that claim within 3 months of his engagement ending.
Before this case, it was previously understood (based on King v Sash Windows) that indefinite carry over of leave only applied where a worker had not taken any holiday. This case extends the principle to the scenario where an individual has taken holiday but not been paid anything for it.
This decision makes the stakes of wrongly denying worker status much higher as workers will, once terminated, be able to claim pay in lieu of 4 weeks of paid Euro Leave for each year they had unpaid holiday back though the duration of their engagement (provided they bring such a claim within three months of termination). As the claim is brought under the Working Time Regulations, the two-year backstop limit on unlawful deductions from wages is not relevant.
Many companies who have contractors/consultants may be vulnerable to claims on this basis since most companies (and their contractors/consultants) will have contracted on the premise that self-employment does not include the right to paid holidays. The consequence of this case could lead to significant exposure, particularly where engagements have been long term and given the fact that asserting the right to worker status is not incompatible with self-employed status for taxation purposes (so some contractors could have their tax cake now and eat it on holiday later).
Employers cannot easily take steps now to extinguish these liabilities (which may relate to unpaid holiday pay from many previous years), except by terminating engagements which may flag the issues to individuals and could still lead to claims if they're brought within 3 months of termination. If you were to go down this route, it would be sensible to align this with other changes in the business to have a separate narrative to justify the reason for the change.
Where you contract with large numbers of individuals on the premise that they are self-employed, it would be sensible to carry out a worker status assessment and seek an audit on your exposure to claims if the contractors were able to successfully establish they are workers. You would also be sensible to put in place stricter controls to prevent parts of your business from merrily engaging with ‘contractors’ on the premise they are self-employed, without having given thought to whether there is a risk that the relationship could meet the worker status test (which courts have been increasingly willing to find).
Currently, where an individual is seeking to bring a claim for unpaid or underpaid holiday as an unlawful deduction from wages, they have to do so within 3 months of the underpayment and can only claim in respect of a series of underpayments which are not broken by 3 months or more (this principle was established by the EAT in Bear Scotland v Fulton). Often this means that holiday pay claims under the unlawful deduction from wages route are quite limited.
In obiter comments in Smith v Pimlico however, the Court of Appeal has given a ‘strong provisional view’ that Bear Scotland v Fulton was wrongly decided and that a claim for a ‘series’ of deductions under unlawful deduction from wages legislation is not broken by a 3-month gap between deductions. Although Bear Scotland v Fulton currently remains the legal position in Great Britain (Northern Ireland reached a difference decision a while ago), this comment makes it likely that any challenge to this decision will be successful. However, the statutory backstop on unlawful deductions introduced in 2015 would still limit such claims (i.e. where holiday pay claim is pleaded as an unlawful deduction from wages claim) to the previous two years only.
If you would like to find out more about how this affects you, contact us today.
