Court of Appeal makes a seismic decision regarding holiday pay claims
Details
“An employer who does not allow a worker to exercise the right to paid annual leave must bear the consequences.”
The Court of Appeal earlier this week (01/02/22) delivered a judgment that is likely to have a seismic impact on our understanding of the law regarding holiday pay. The judgment is the latest decision in a long-running holiday pay dispute between Mr Smith and Pimlico Plumbers. The court held that a worker, who had been denied paid holidays because he was wrongly categorised as self-employed, was entitled to recover compensation for the holiday he ought to have accrued throughout his entire period of service. We consider the practical implications this decision has for employers.
Back to basics: legal landscape
- Workers are entitled to 5.6 weeks paid annual leave per year. This is made up of 4 weeks’ leave derived from the Working Time Directive (EU Leave) and 1.6 weeks leave granted domestically via the Working Time Regulations 1998 (WTR Leave).
- Workers whose rights to paid annual leave are denied, or whose holiday pay is not correctly calculated so that they are underpaid, can bring a claim either:
- under the Working Time Regulations 1998 (WTR), within three months of the relevant breach; or
- for unlawful deduction from wages, within three months of the last of the ‘series’ of unlawful deductions. - In an unlawful deduction from wages claim, there is a two-year limit on any back payments (for claims lodged on or after 1 July 2015).
Factual background
Mr Smith was engaged as a plumber by Pimlico Plumbers on a self-employed basis in 2005. Although Mr Smith took periods of unpaid leave, he was never paid any holiday pay because Pimlico denied that Mr Smith was a worker. After the working engagement was terminated in 2011, Mr Smith brought various employment claims, including claims for holiday pay. Pimlico argued that S was a self-employed contractor and that his claims should therefore be dismissed. A preliminary hearing was held to determine the true nature of the working relationship. The tribunal held that that Mr Smith was not a self-employed contractor in business for his own account; he was a worker. Pimlico unsuccessfully appealed this decision all the way up to the Supreme Court, which held that the tribunal had been entitled to hold that Mr Smith was a worker because he was not truly an independent contractor and the company was not his client or customer.
This latest instalment of this long-running dispute relates to Mr Smith’s claims for holiday pay. Although it had determined Mr Smith to be a worker, and therefore entitled to paid annual leave, the tribunal dismissed Mr Smith’s holiday pay claim because: (a) he had not pleaded a claim for a payment in lieu on termination (under regulation 14 WTR 1998); and (b) he was outside the 3-month limitation period in respect of his claim for time off he had taken, but been unpaid for (under regulation 30 WTR 1998).
EAT decision
The tribunal’s decision was later upheld by the EAT, which held that the tribunal had not erred in its interpretation of the ECJ’s decision in King -v- Sash Window Workshop [2018] ICR 693. In King, the ECJ had considered for the first time a situation where the worker had not received paid annual leave because his employer had wrongly characterised him as self-employed, and held that four weeks’ EU Leave carried over each year and crystalised as an entitlement to a payment in lieu upon termination. The EAT held that the King principle did not apply to Mr Smith because he had taken holidays over the six years he worked for Pimlico, albeit he had not been paid for this time off.
Although declining to determine the point, the EAT went on to make non-binding comments regarding the correct operation of a claim for unlawful deduction from wages. An earlier decision of the EAT meant that a gap of more than 3 months in the series of deductions (during which no deduction is made) would break the chain of unlawful deductions, thus rendering much of the claim out of time (Bear Scotland Ltd and ors -v- Fulton and ors [2014] UKEAT 0047_13_0411 confirmed in Fulton and anor -v- Bear Scotland Ltd [2016] UKEAT 0010_16_0912). Although the Northern Ireland Court of Appeal (NICA) had since declined to follow the EAT’s decision in Bear Scotland, and had held that a series of deductions is not necessarily broken by a gap of 3 months or more (Chief Constable of Northern Ireland -v- Agnew [2019] NICA 32), this decision was not binding in England and the EAT said that it did not consider that it had grounds to depart from the Bear Scotland principle.
Mr Smith appealed to the Court of Appeal.
Court of Appeal decision
The Court of Appeal earlier this week (01/02/22) held that workers, and those wrongly denied worker status like Mr Smith, who have been completely denied entitlement to paid annual leave are entitled to their four weeks’ EU leave per year regardless of whether they have taken any unpaid time off or not. This entitlement to EU leave carries over each year and will crystalise to an entitlement to payment in lieu on termination.
Workers are entitled to a single right to paid annual leave (which encompasses both a right to time off and pay). Mr Smith could only lose the right to his four weeks’ EU Leave if Pimlico could prove that he had been given the opportunity to exercise the right to take paid holiday. As Pimlico’ s position had been that Mr Smith had not been a worker, it could not prove that he had ever been given the opportunity to take paid annual leave. Therefore, Mr Smith’s claim for six years’ worth of accrued annual leave crystallised on termination.
The leading judgment includes a stark reminder for employers operating business models which wrongly categorise individuals as ‘self-employed’ as opposed to ‘workers’ that, “An employer who does not allow a worker to exercise the right to paid annual leave must bear the consequences.”
For claims brought under the WTR, the decision effectively sweeps aside the two-year limit on back pay for unlawful deductions. The entitlement to paid annual leave carries over and crystalises on termination so that, as long as a claim is brought under the working time provisions within three months of termination, the worker can claim back pay for the whole period when they have been denied the right to paid holiday.
Although not strictly required to determine the point because of this decision, the Court of Appeal also went on the make some non-binding comments regarding the correct operation of unlawful deduction from wages claims, specifically regarding whether a three-month gap in deductions will break the chain or ‘series’ of unlawful deductions. The Court of Appeal expressed its ‘strong provisional view’ that the NICA in Agnew was correct, and that the EAT’s decision in Bear Scotland was wrong on this point. In the court’s view, ‘The identification of a sufficient factual and temporal link between deductions will answer the question whether there is a ‘series’ without the need to imply or infer a limit on the gaps between particular deductions relied on as making up the series.’ As the Court of Appeal’s comments in this regard are non-binding, it is not yet clear if employment tribunals will be prepared to decline to follow the Bear Scotland principle. If they do so, in practical terms this means that where a worker has been ‘underpaid’ holiday pay (eg because regular overtime was not taken into account), it is likely that the tribunal will hold each occasion when holiday pay was underpaid formed part of a ‘series’ of underpayments, unless there has been an actual break (eg when their holiday pay began to be correctly calculated).
