Worker holiday pay issue heats up
On 1 February 2022, the Court of Appeal made a significant decision in relation to holiday pay, specifically whether a worker’s right to paid annual leave carries over into subsequent leave years when they have been permitted to take the leave but have not been paid for it. The Court of Appeal decided in Smith v Pimlico Plumbers Ltd that the right does carry over in such circumstances and the paid leave continues to accumulate year on year until the termination of the worker’s contract, at which point the worker is entitled a payment in respect of all the accumulated leave.
The Court of Appeal also gave a “strong provisional view” that previous case law (Bear Scotland v Fulton) was wrong in establishing that a gap of more than three months would break a series of deductions in an unlawful deduction from wages claim, with the effect that only the deductions after the three month gap could be claimed. The Court of Appeal said that the series of deductions should be determined on the facts of each case. This was not part of the substantive judgment but is likely to be highly influential to future Appeal Tribunals considering such claims.
This is a legal battle which has been going on for over ten years. Mr Smith, a former plumber and heating engineer for Pimlico Plumbers, has been all the way from the Employment Tribunal (ET) to the Supreme Court (the UK’s highest Court) to establish that he was a worker during his contract with Pimlico Plumbers rather than an independent contractor. As a worker, Mr Smith was entitled to 5.6 weeks paid annual leave, consisting of 4 weeks basic leave deriving from the Working Time Directive and 1.6 weeks domestic leave.
During his 6 years working for Pimlico Plumbers, Mr Smith had been permitted to take leave but he was not paid for this leave as Pimlico Plumbers maintained that he was a self-employed contractor. After his worker status was established, Mr Smith returned to the ET to determine whether he was owed a payment in respect of his entitlement as a worker to 4 weeks basic paid annual leave pursuant to Regulations 13 and 16 of the Working Time Regulations 1998 for each of the 6 years that he worked for Pimlico Plumbers. He claimed a total of £74,000.
The ET and the Employment Appeal Tribunal (EAT) held that he was not entitled to such a payment. Firstly, they found that his claims were not brought within three months of the most recent denial of holiday pay and were therefore out of time. The ET distinguished Mr Smith’s case from King v Sash Window Workshop which established that workers are able to carry over the right to paid annual leave into subsequent leave years if they have not had the opportunity to take it. The ET found that Mr Smith had taken annual leave, he just had not been paid for it so the right to paid leave did not carry over. The EAT also took the view that Mr Smith’s paid leave entitlement did not carry over as he had been allowed to take annual leave (albeit unpaid) and he had therefore been allowed to exercise at least part of the right and could not be said not to have exercised the right at all.
The Court of Appeal’s decision and the employer’s burden
The Court of Appeal disagreed with the lower courts and decided that Mr Smith’s right to 4 weeks basic paid annual leave did carry over from year to year and he therefore was entitled to a payment in respect of his basic annual leave entitlement for the full 6 years he worked for Pimlico Plumbers.
The Court of Appeal found that the right to paid annual leave can only be lost at the end of the holiday year when the worker has had the opportunity to take the paid leave. Mr Smith had not been permitted to exercise his full right as a worker to 4 weeks paid annual leave. The right is to leave and pay and both must therefore be afforded to a worker.
The Court of Appeal indicated that employers must be prepared to bear the burden of showing the following:
- that the employer “specifically and transparently” gave the worker the opportunity to take the paid leave;
- that the employer encouraged the worker to take the paid leave; and
- that the employer told the worker that the right to the paid leave would be lost at the end of the holiday year if they did not take it.
The Court of Appeal held that if an employer cannot meet this burden, then a worker’s right to paid leave for that holiday year carries over to the next and continues to accumulate until the termination of the worker’s contract, at which point the worker is entitled to a payment in respect of all the accumulated leave.
Employers must be aware that if a self-employed contractor is in fact a worker, their right to paid annual leave will accumulate year on year, even if they have been allowed to take leave but have not been paid for it due to the employer’s understanding that they are self-employed. If a self-employed contractor does establish worker status, the accumulated leave could amount to a substantial payment on termination of the contract as this case shows.
Further, employers will now be expected to show that they have not only given workers the opportunity to take paid leave, but that they have also actively encouraged their workers to take the paid leave.