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Court of Appeal decision makes it easier for workers to bring holiday pay claims

Last year, the EAT held in Smith v Pimlico Plumbers that, whilst a worker is entitled to carry over any leave that was not taken because the employer refused to pay it (following the ECJ’s decision in King v Sash Windows), this principle does not apply to leave that has actually been taken, albeit unpaid. 

The Court of Appeal (“CA”) has now overturned this decision.  A worker can carry over leave that has been taken but not paid because an employer did not recognise that they were a worker.  This decision will have significant repercussions for employers.

The facts

Mr Smith worked for Pimlico Plumbers between August 2005 and May 2011.  Under his contract, he was ‘self-employed’ but the Supreme Court established his status as a worker, and therefore he was entitled to paid annual leave.

Mr Smith claimed that he was entitled to unpaid holiday pay for the duration of his time with Pimlico Plumbers.  Whilst he was entitled to (and did) take annual leave, he was not paid for it, which meant he had periods of unpaid leave that he had taken.  Upon termination of his employment, Mr Smith argued (following the ECJ’s decision in King v Sash Windows) that he should be allowed to carry over a right to payment for all of the unpaid leave that he had taken.  The Employment Tribunal and EAT decided that he could not rely on King as that case only applied to leave which had never been taken.

CA’s decision

The CA allowed Mr Smith’s appeal finding that he should be compensated for all of the unpaid leave he had taken.  Although the worker in King claimed compensation for leave which he did not take, the ECJ’s decision there rested on principles with a “broader reach” and should be read as extending to workers who have taken leave but have not been paid for it.

The CA held:

1.  Workers have a single right to “paid annual leave” and an employer who does not allow a worker to exercise that right must “bear the consequences”;
2.  Workers would not lose the entitlement to paid leave unless employers could clearly demonstrate that they had given the workers the opportunity to take paid annual leave, encouraged them to do so, and informed them that the right will be lost at the end of the leave year if not exercised; and
3.  Employers should set up and maintain systems to enable workers to take paid leave – which may include “recognition and acceptance” of worker status and worker rights “in appropriate cases”.

The CA went on to look at a technical question of whether a “series of deductions” (for the purposes of holiday pay claims brought as unauthorised deductions from wages claims under the Employment Rights Act 1996) was broken by a gap of three months or more.  This principle was established by the EAT in the case of Bear Scotland.  It allowed employers to use technical arguments to limit the scope for workers to bring claims for underpaid holiday pay stretching back to previous holiday years.  The CA gave a “strong provisional view” that Bear Scotland was wrong on this point.  Whilst not binding, this view is likely to mean that claimants will start to challenge decisions that limit the amount of compensation they can recover for unpaid holiday pay.

Impact

Employers need to be live to the potentially significant additional costs associated with getting worker status wrong.  It would be prudent to carry out internal audits to identify which self-employed individuals may, in fact, be workers and as such be entitled to workers’ rights including the right to paid holiday.

Going forward, individuals who have not been paid for holiday, and later prove worker status, will be able to claim pay for all holiday, whether taken or not, and irrespective of any gaps in when leave was taken.

There remains scope for further clarification.  However, it would seem that, where such claims are brought by individuals who remain employed or engaged as a worker, they will need to be brought as a claim for ‘unlawful deductions from wages’ and will be limited to two years of back pay.  However, where brought at the point of termination, the two year backstop won’t apply, meaning that claims can be made all the way back to the start of the relationship, or 1998 (when the Working Time Regulations were introduced) whichever is later.

This area of employment law is complex and we would urge you to take advice from our team of experts.

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