Why is the latest case in the holiday pay claim dispute between Mr Smith and Pimlico Plumbers (“Pimlico”) so important for employers to be aware of?
Despite it appearing to be just one more in a long line of cases involving the same parties, it has significant implications in relation to paid holiday for those who have been classed as self-employed rather than “workers”. Perhaps more importantly, it also calls into question an extremely important decision from 2014 (Bear Scotland – see below), which states that an employer’s liability to pay holiday pay to employees and workers is broken if there has been a gap of more than three months between a “series” of unlawful deductions (i.e. underpayment or non-payment of holiday pay).
The origins of Mr Smith’s holiday pay case, like many others recently, related to a long-standing dispute as to his status.
It was back in 2018 that the Supreme Court held that Mr Smith as a “worker” for Pimlico, and not self-employed. Mr Smith’s status was a preliminary factor that had to be determined before the Courts could go on to determine whether they could consider his original claim for holiday pay (amongst other things).
Following the decision of the Supreme Court, Pimlico Plumbers disputed Mr Smith’s claim for holiday pay. In March last year, the Employment Appeal Tribunal (EAT) dismissed his claim for holiday pay because it agreed with the Employment Tribunal (ET) that:
- Mr Smith had only claimed for holiday pay which he had actually taken but not been paid for, and the last time he had taken holiday was more than three months after he had lodged his claim. Therefore his claim was out of time;
- Mr Smith had not made reference in his claim to Regulation 14 of the Working Time Regulations 1998 (WTR) – pay for untaken holiday on termination, both relating to his final year and all the preceding years when he had not taken his full statutory holiday entitlement, therefore this could not be considered;
- A case in the European Court of Justice (ECJ), King v Sash Windows & another (“Sash Windows”) did not entitle Mr Smith to carry over holiday he had taken, but not been paid for. The ET and EAT held that the Sash Windows case only applied where the worker had not taken leave because the employer would not pay for it (like Mr King, who had also initially been thought of as self-employed); and
- Since he had also not claimed for holiday he had not taken on termination the Sash Windows case did not help him in relation to that.
However, in a judgment handed down on 1 February 2022, the Court of Appeal overturned the ET and EAT’s interpretation of the Sash Windows case, and found that Mr Smith was entitled to holiday pay stretching back for the six years that he was a worker.
Entitlement to pay for unpaid leave could be claimed years later
All employees and “workers” have the right to take paid annual leave under the WTR. This is split into four weeks’ per year arising from the original EU Working Time Directive (WTD), and a further 1.6 weeks added by the UK into the WTR in 2007. Mr Smith was never paid for any holiday which he had taken during his engagement with Pimlico, on the basis that they had classified him as self-employed, and not a “worker”.
As said above, Pimlico disputed Mr Smith’s entitlement to be paid for holiday, and won in the ET and EAT, on the grounds described above. In the Court of Appeal Mr Smith continued to argue that he had made a claim for untaken holiday pay on termination under Regulation 14 WTR (even though he had not specifically referred to it). The Court of Appeal, however, concurred with the findings of ET and EAT that Mr Smith had not properly made this claim.
This meant that Mr Smith had to rely on the Sash Windows case, which (being an ECJ case) only applies to the four weeks’ basic leave under the EU WTD, and not the additional 1.6 weeks. If he had brought a Regulation 14 claim, or brought a claim within three months of the last time he took holiday then the additional 1.6 weeks could have been included.
In determining his claims under ECJ case law, the Court of Appeal firstly agreed that the UK’s withdrawal from the EU was irrelevant here, as there had been no change to UK law on this topic since 31 December 2020 (when the EU withdrawal transition period ended). Therefore, EU law still had to be considered and therefore so did the Sash Windows case.
The Court of Appeal held that Sash Windows had been wrongly interpreted by the ET and EAT. If an employer refuses to pay holiday pay at all, it does not matter if the holiday has been taken or has not been taken: the worker has been denied, for reasons beyond his control, the particularly important health and safety right guaranteed by the WTD and the Charter of Fundamental Rights of the European Union. The right to carry it over and have it paid on termination of the engagement therefore applies.
A worker only loses the right to claim holiday pay on termination from previous years if the employer can show that it specifically and transparently gave the worker the right and opportunity to take the paid holiday, encouraged them to take it, and informed them that it would be lost at the end of the leave year if they did not do so. If the employer does not do so, under EU principles and the Sash Windows case, the right to paid holiday does not lapse at the end of that year, but carries over each year until the termination of the engagement, at which point the payment becomes due to the worker. Since Mr Smith had brought that WTD claim within three months of the termination of his engagement, it was in time and he could claim for four weeks’ paid holiday accruing back six years to the start of his contract with Pimlico.
This case is particularly significant for those, often in the “gig economy”, who have managed to establish that they are not self-employed but are in fact “workers”. Usually, in those situations, the employer will have proceeded on the basis that there is no entitlement to holiday pay, whether or not the individual took time off, and so, on the back of this case, the employer could end up footing the bill for that worker’s entitlement to paid holiday going back several years to the start of the engagement. The (unlikely) exception to this would be if an employer could show that it transparently gave the worker the right and opportunity to take paid holiday, encouraged them to do so, and informed that it would be lost at the end of the leave year if they did not do so. Any such claim for unpaid holiday in the final year would need to be brought within three months of termination of the engagement.
The back pay of holiday to this extent does not seem to be applicable to those individuals, usually employees, who have been underpaid holiday pay (e.g. by not having overtime included in the calculation) rather than those who have not been paid holiday pay at all.
Is a three month "break" in a series of holiday pay underpayments still a defence for employers?
A further issue raised by Mr Smith, which could have a significant effect on employees/workers who have been underpaid holiday (as opposed to not being paid holiday pay at all) was a challenge to a ruling which has been crucial to employers defending large claims of underpaid holiday. A case decided by the EAT back in 2014, Bear Scotland Ltd v Fulton, allowed workers to include non-guaranteed overtime towards the calculation of their holiday pay. However, it had also introduced the concept that where claims for underpaid holiday pay had been brought as a “series of unlawful deductions of wages” (i.e. underpayments), a gap of more than three months between underpayments would be enough to “break” the “series” and underpaid holiday claims could not go back any further. This was because, according to the judge, the usual time limit for bringing a claim is three months. A gap longer than this should have the effect of meaning the claim is out of time, even if it is part of a “series of unlawful deduction of wages”.
When this 2014 EAT case was decided, potentially staff would have been able to claim underpaid holiday pay as a series of deductions going back many years. The judge’s ruling has remained in place in Great Britain, so that, for example, if a proper amount of holiday pay has been paid in the middle of a “series”, it breaks the “series” of unlawful deductions. In Chief Constable of Northern Ireland v Agnew (“Agnew”) in 2019, however, the Northern Ireland Court of Appeal ruled that there was no legal basis for the judge to have made that ruling in 2014. It held that a “series” of deductions was not broken by a three-month gap if the deductions were factually linked. Since then, some GB claims have sought to rely on that decision but, being the Northern Ireland Court of Appeal, it was only “persuasive”. It has not been followed in GB until now, and the Agnew case itself has not reached the Supreme Court.
However, going back to Mr Smith’s case, although the Court of Appeal did not have to decide this point because Mr Smith had already succeeded in his holiday pay claim, it was invited to discuss the 2014 case and Agnew, because the EAT had refused to follow Agnew in Mr Smith’s previous hearing. This time, the Court of Appeal stated that its “strong provisional view” was that Agnew was correct, and that the judge in the 2014 EAT case had no legal basis to impose a break in a series of deductions simply by virtue of a three-month gap. Because it was not necessary for Mr Smith’s case, this “strong provisional view” is not legally binding, but is likely to be followed by other ETs in due course, since it is expressed by the GB Court of Appeal, and could well also be followed by another EAT.
Employers’ liabilities are still helped somewhat by the Deduction from Wages (Limitations) Regulations 2014, which came into force for claims on or after 1 July 2015. This introduced a cut-off period of two years, before which claims for certain types of payment, including holiday pay, could not succeed even if there was a continuing “series of deductions” beyond two years.
However these Regulations do not affect cases like Mr Smith’s, because in the end he was not relying on a series of deductions from an underpayment of holiday. His case turned on not being paid any holiday pay at all for a number of years and the deprivation of his right under the WTD allowed his claim to go further back, as in the Sash Windows case.
- Review any individuals who are classed as self-employed and denied holiday pay, but who may end up being classed as “workers”. Such workers could have claims that go back further than two years;
- Remember that this case and other cases like this will be limited to the four weeks’ leave under the WTD and do not include the additional 1.6 weeks’ leave. However, if claims are brought as a series of unlawful deductions, as opposed to non-payment under the WTD, holiday pay for the full 5.6 weeks will be limited to two years under the Regulations above;
- Review whether in any ongoing holiday pay claims you are relying on a gap of more than three months or having made a proper payment to break a claim for a “series of deductions” (underpayments) of holiday pay. This may no longer be a defence;
- Consider whether you are fulfilling your duties as an employer to encourage the right to ensure paid holiday is properly taken;
- Watch this space as to whether the two year limitation period imposed by the 2014 Regulations remains effective for claims of underpayments of holiday pay – this could be an area for future challenge.
At the time of writing, we do not know whether Pimlico will appeal the Court’s decision.
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