Workers, holiday pay and holiday carry over – Smith v Pimlico Plumbers Ltd continuing to impact employment law.
The Court of Appeal delivered its judgment in Smith v Pimlico Plumbers Ltd yesterday with a ruling which could have significant implications for organisations that wrongly engage workers as self-employed contractors, and also for employers whose staff receive any kind of variable pay.
The judgment and the background to the case
The case concerned different issues from those of status raised in the infamous Pimlico Plumbers Ltd and another v Smith in which Mr Smith, a heating engineer, succeeded in the Supreme Court to be found to be a “worker” and not self-employed. In this second round of Smith v Pimlico Plumbers the focus was on the enforcement by a “worker” of the right to paid annual leave. Mr Smith had appealed the decision of the EAT, which held that he could not carry over the right to holiday pay from one leave year to the next where he had taken the holiday but had not been paid for it. Yesterday the Court of Appeal allowed the appeal and held that Mr Smith was entitled to receive payment for the unpaid holiday that he had taken throughout his employment until his dismissal. This decision could prove to be even more significant than Mr Smith’s first victory and will have importance for both workers denied the right to paid annual leave and also for all unlawful deductions from wages claims.
In the lead judgment, Simler LJ, held that the principles that a worker can only lose the right to paid annual leave “if the employer can specifically and transparently show that they gave the worker the opportunity to take paid annual leave, encouraged the worker to take paid annual leave and informed the worker that the right would be lost at the end of the year” are equally applicable to any taken but unpaid leave. If a “worker” has been incorrectly classified as self-employed, an organisation is unlikely to be able to evidence this, highlighting how important it is to get the employment status right.
Workers can already rely on King v Sash Windows to carry over any untaken portion of four weeks’ leave each leave year and gain full compensation for it on termination. Now, as a result of the decision in the Court of Appeal, as well as carrying over untaken leave, they can carry over leave which they have taken but not been paid for, with no restriction on the period of carry over – and no backstop of two years to claims.
For Mr Smith this means, whenever he took holiday but wasn’t paid for it, up to four weeks (in accordance with the Working Time Directive (WTD)) of that unpaid leave carried forward into the next leave year and continued to accumulate until his employment ended. According to the Court of Appeal, on termination of his employment, Mr Smith was due to be paid for all that carried over, taken unpaid leave (as well as any untaken leave up to the four weeks per year) at the rate of his normal remuneration while working. Mr Smith is claiming £74,000 of holiday pay accrued over his six years’ service. The case is returning to the Employment Tribunal to determine the exact amount he is owed.
What is the impact of this judgment?
Financial implications
As this case shows, the financial cost of missed holiday pay can be significant. Individuals who were incorrectly denied worker status and not paid holiday pay, can now claim compensation for all of their four weeks of leave under the WTD – whether they have taken that leave or not – for every year of their employment. It is already established in King v Sash Windows that it is no defence that the employer honestly believed the individual was not legally a worker.
The two-year limit in unlawful deductions from wages claims
The Court of Appeal’s judgment could also impact the two-year limit in unlawful deductions from wages claims. The government enacted that backstop because of concerns over the potentially huge bills employers could face for historic unpaid holiday pay going back years. The ruling gives the possibility to challenge whether that backstop is lawful. According to this ruling, provided a claim is brought within three months of the termination of employment, an individual who has not been given paid leave, can claim payment for all the untaken leave and now the taken four weeks leave in the past for each year worked– without the two year back-stop. There is also an argument that the claim should include interest, adding further to the potential cost.
Staff who receive variable pay
The ruling is also potentially important for employers whose staff receive variable pay, for example where employees are paid different rates for different hours worked, for different types of work or related to commission. They could likewise be faced with legacy claims for unlawful deductions from wages for underpayment of holiday pay when the employment ends.
The ‘series’ of deductions principle
Another important point to watch from the judgment of Simler LJ’s, which while it was obiter, considered whether the principle in the case of Bear Scotland v Fulton that a ‘series’ of deductions was broken by a gap of three months or more between under-payments is correct. She gave a “strong provisional view” that a three-month gap does not break a series of under-payments of wages. For now, the principle in Bear Scotland remains binding on Tribunals – but perhaps not for much longer.
What should employers do?
Now is the time for organisations and employers to focus on how they classify the status of contractors and calculate holiday pay, otherwise they could face huge holiday pay liabilities going back many years.
Our Employment Law Team is experienced in advising on holiday pay issues and is well placed to assist you. To ensure you are up to date with the latest in holiday pay, contact Lindsey Knowles or another member of our Employment Law Team.
This article contains a general overview of information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.
Update: 4 March 2022
The Court has now updated its judgment in Smith v Pimlico Plumbers, adding a postscript and appendix. The judgment now includes additional wording to be read into Regulation 13 of the Working Time Regulations 1998.
Regulation 13 must now be read with this wording at sub-paragraph (16): “Where in any leave year an employer (i) fails to recognise a worker’s right to paid annual leave and (ii) cannot show that it provides a facility for the taking of such leave, the worker shall be entitled to carry forward any leave which is taken but unpaid, and/or which is not taken, into subsequent leave years.” There are consequential changes to Regulations 14 and 30.
