Employment status and holiday entitlement remains a hot topic, particularly with the exponential growth of the gig economy. Here, Lewis Kerr and David Sheppard review the latest development in the extraordinary legal saga of Smith v Pimlico Plumbers Ltd, after the Court of Appeal gave new clarity about the rights of workers to compensation for unpaid holiday and underpayments of holiday pay.
The case started in the employment tribunal in August 2011, when Mr Smith brought claims against Pimlico Plumbers Ltd for unpaid holidays. Such holidays are a statutory right afforded to workers and employees, but not to self-employed contractors (which is what PP maintained Mr Smith was).
The case progressed on this issue all the way to the Supreme Court, which decided in 2018 that Mr Smith had worker status and entitlement to paid holiday because he was expected to perform the work personally, meaning he did not have the right to send a substitute in his place if he could not do the work. Just like a P-trap (the U-shaped pipe under kitchen sinks), the case was sent in the opposite direction, back to the employment tribunal.
Here, a new blockage presented itself to Mr Smith. Pimlico argued that his holiday pay claims were brought almost 3 months out of time. That is, calculating the time limit from the last date on which he should have been paid for his holiday (5th February 2011).
Mr Smith sought to rely on the European Court of Justice case of King v Sash Window Workshop to counterargue that the time limit should be instead calculated from the time his contract with PP ended (3 May 2011).
The tribunal rejected his argument, stating that King v Sash only concerned cases where a worker had not taken any annual leave at all because their employer refused to pay them during any periods of leave, as opposed to cases, like Mr Smith’s, where a worker did take periods of unpaid leave despite not being granted paid holiday by their employer.
As a result, the time limit for Mr Smith to bring his claim was found to have started from the date of his last unpaid period of leave, and not from the date of termination. Mr Smith appealed to the Employment Appeal Tribunal but was unsuccessful.
Fast forward to December 2021: Mr Smith appealed to the Court of Appeal against the decision of the Employment Appeal Tribunal. The Court of Appeal decided that Mr Smith’s claim was for the loss of the right to four weeks paid annual leave granted to workers under the European Working Time Directive (EWTD).
Pimlico, by wrongly treating Mr Smith as self-employed, failed to acknowledge that he had the statutory right to paid annual leave. Therefore, Mr Smith’s right to EWTD paid annual leave had carried over, accumulated, and crystallised when his contract was terminated. This means that he was entitled to payment for all accrued but unpaid EWTD annual leave at the point of termination.
As the time limit was treated by the Court of Appeal as starting on his termination date on 3 May 2011, and he issued his claim on 1 August 2011, it was found that his claim was within time and issued on the day before the deadline.
The Court of Appeal has confirmed that the right to carry over of unpaid EWTD annual leave is no longer limited to situations where the worker is deterred from taking any annual leave due to lack of remuneration.
This will pose potentially huge historic liabilities for employers in the UK – particularly if they have on a large scale wrongly engaged workers as self-employed contractors, and denied them access to paid holiday. For workers incorrectly engaged as a contractor for several years, the outstanding holiday pay liability on termination could be significant.
The Court of Appeal found that employers have an obligation to ensure their workers and employees take their paid holiday each year to avoid the carry over and accumulation of leave and potential King v Sash-claims. A worker will only lose the right to carry over EWTD holiday and receive a payment of unpaid EWTD holiday pay on termination when the employer can show it:
Employers therefore need to urgently check their holiday systems and policies and to take proactive steps to ensure all employees and workers are regularly reminded of their holiday entitlement and need to take such leave by the end of the relevant holiday year, to minimise the risk of unused holiday potentially carrying over.
It is important to be aware that the King v Sash-principle applies only to the four weeks paid holiday entitlement granted under the EWTD. It remains to be seen if this principle would also apply to the additional 1.6 weeks holiday provided to UK workers under the Working Time Regulations, and workers’ contractual entitlement over and above any statutory entitlement.
The Court of Appeal also formed a “strong provisional view” that claims for a series of historic underpayments of holiday pay that are brought as a unauthorised deduction from wages claim – although now limited to going back by a maximum of 2 years by legislation – are not broken by any gap in any series of underpayments of three months or more. This contradicts the findings in the Bear Scotland case, and means that workers and employees can potentially bring wages claims for back payment of two years of underpaid holiday, regardless of any lengthy gaps between times they took any holiday.
This case will have immediate effect in the UK, as the King v Sash decision predated Brexit and is part of retained EU law in the UK, and a deluge of new holiday pay claims could be in the pipeline. But now that the UK has left the EU, the extent of holiday pay entitlement and claims may well be the target of deregulation by the UK Government in the near future.
Either way, it’s important that you keep track of the development of this landmark case. To discuss in further details how all of this impacts your organisation specifically, or if you need help to review your policies, holiday arrangements and use of contractors, please get in touch with our employment team.