Holiday Pay – the right to payment for unpaid annual leave

This article sets out the latest update in the long ongoing case of Smith v Pimlico Plumbers Ltd. The Court of appeal has held that a worker does have the right to payment for annual leave if they have taken the leave and not been paid for it. The appeal further allowed a worker the right to payment for unpaid annual leave in every year that he had taken it, regardless of there being a gap of more than 3 months between each block of leave.  

Background to the case 

The Claimant, Mr Gary Smith, had worked for the Respondent, Pimlico Plumbers Ltd (“PP Ltd”) for approximately 6 years under the title of “self-employed independent contractor”. PP Ltd maintained that Mr Smith was not a worker under the meaning of the Working Time Regulations 1998 (“WTR”) and was therefore not entitled to paid annual leave. Mr Smith would therefore routinely take unpaid leave every year he worked for PP Ltd.

In 2011 Mr Smith was suspended and required to return his van and equipment to PP Ltd, which he considered to be repudiatory breach of his contract. Mr Smith brought an Employment Tribunal claim for holiday pay under WTR and unauthorised deductions from his pay under the Employment Rights Act 1996 (“ERA”). 

In the initial claim, PP Ltd disputed Mr Smith’s claims that he should be recognised as a “worker” subject to the WTR; this point went all the way to the Supreme Court which found in Mr Smith’s favour, deciding he was a worker, and then the claim returned to the Employment Tribunal for consideration on the holiday pay point. 

Employment Tribunal and Employment Appeal Tribunal (EAT) findings

The Employment Tribunal found that Mr Smith was out of time to bring his claim for unlawful denial of holiday pay (Reg 16 WTR) or unauthorised deductions from pay (Reg 30(2) WTR and S.23(3) ERA) which had to be brought within 3 months of the denial or deduction. The Tribunal also considered the principles set down in the case of King v Sash Window Workshop (“King”), a European Court of Justice (“ECJ”) case, which could be read to allow Mr Smith entitlement to accrued holiday pay (pay for every instance of unpaid leave he had taken up until termination). The Tribunal distinguished Mr Smith’s case from King’s, wherein the claimant had not actually taken their leave, and stated because Mr Smith had in fact taken the leave but simply not been paid for it the principle in Kingallowing the claimant accrued holiday pay did not apply. The EAT upheld the Tribunal’s findings.

Court of Appeal Overturns – Key Findings

The Court of Appeal have now heard the case and have overturned the previous findings. The Court of Appeal decided not to distinguish the case of King. They decided that the ECJ decision in King rested on broader principles than the fact that the leave was not actually being taken by the claimant in that case and should be read to extend to workers who took leave but were unpaid for it. It emphasised that Article 7 of the Directive states there is a right to “paid annual leave” and this right should not be made “subject to any preconditions whatsoever” by member states. 

Longer than 3 month gap between pay deductions 

Both the Employment Tribunal and the EAT cited the case Bear Scotland which stated that a gap of more than 3 months between pay deductions prevents the deduction forming a “series” for the purpose of s.23 ERA. The Court of Appeal drew the opposite conclusion, explaining that the reasoning in Bear Scotland was not supported by any express words in Section 23. 

Consideration for Employers in light of this decision

Is your worker truly self-employed?

The decision will most likely have an impact on the gig economy where workers have increasingly been misclassified as self-employed and denied holiday pay as a result. It will not be a defence to any employer to argue that they mistakenly classed the worker as self-employed. Therefore if the misclassed worker can bring a claim and establish their status as a “worker” under WTR, if that worker has been with the employer for over 10 years for example, the employer will potentially be liable for over 10 years’ worth of unpaid holiday. 

Do you actively encourage your workers to take annual leave? 

The Court of Appeal judgment also emphasised that if employers want to argue the worker or employee forfeited their right to take paid annual leave, they will have to prove they gave the worker or employee the opportunity to take paid annual leave, encouraged them to do so and made it clear that if they did not do so the right would be lost at the end of the holiday year. Therefore, employers should review their holiday polices and or employment contracts to make sure they are complying with this duty.It is possible this case will be appealed but in the meantime the onus is on employers to make sure they have checked that the status of their staff is correct and followed the correct rules relating to holiday pay. 

How Moore Barlow can help

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