Holiday pay for misclassified workers - carry on carrying over

The Court of Appeal has published a significant decision relating to the treatment of holiday pay for workers misclassified as self-employed contractors. In Smith v Pimlico Plumbers Limited, the Court of Appeal held that a worker denied the right to paid holiday can carry over and accumulate that holiday year on year up to the termination of their engagement, at which point they are entitled to a payment in relation to that holiday. We consider the impact of this decision on employers, particularly those facing worker status disputes.

What was the case about?

Mr Smith worked as a plumber for Pimlico Plumbers. As he was considered to be a self-employed contractor, Pimlico Plumbers did not provide him with any paid annual leave entitlement but Mr Smith chose to take some periods of unpaid leave during his engagement. After his contract came to an end, he brought a claim alleging, among other things, that he was a worker who was entitled to paid annual leave throughout his engagement over the previous 6 years. In 2018, the Supreme Court found that Mr Smith was a worker and was therefore entitled to proceed with his holiday pay claim against Pimlico Plumbers. The Court of Appeal’s recent decision concerned that holiday pay claim.

What was the outcome?

The Court of Appeal found that a worker who is prevented from taking paid annual leave (because the employer does not recognise their right to paid annual leave) can carry over and accumulate their entitlement to paid annual leave each year until termination of their contract, at which point the worker is entitled to payment in respect of the accumulated leave. The fact that a worker chose to take unpaid leave in circumstances where they were denied the right to paid leave did not prevent carry over and accumulation of that paid leave.

Key points from the judgment include:

• The right to paid holiday is a single composite right - the right to holiday is not separable from the right to pay for that holiday. This means that a failure by an employer to pay a worker for leave taken (for example, where the employer challenges the individual’s status as a worker) means the worker taking such leave is not exercising their right to paid holiday. In this circumstance, the worker’s right to paid holiday is preserved and can be carried over and accumulated.
• As the right to paid holiday stems from the European Directive, the ability to carry over and accumulate leave in this way only applies to the 4 weeks’ leave provided for under EU law – this is sometimes referred to as 'Euro Leave'.
• The principles established in the European case of King v Sash Windows (which first established the rules relating to carry over for a worker denied the right to paid leave) apply equally to a worker who takes no leave at all and a worker who takes unpaid leave.
• The Court restated the principle from King that 'an employer who does not allow a worker to exercise the right to paid annual leave must bear the consequences.'
• The right to paid holiday is a fundamentally important health and safety right, which a worker should only lose if they have had the opportunity to exercise that right. The burden is on the employer to show that it:

1. specifically and transparently gave the worker the opportunity to take paid annual leave;
2. encouraged the worker to take paid annual leave; and
3. informed the worker that the right would be lost at the end of the leave year.

• If the employer cannot show each of those three points, the worker’s right to paid leave will carry over and accumulate until termination.
• Because a claim of this type crystallises on termination, the worker will be in time to bring a claim if they bring it within three months of the date of termination (subject to any extension of time related to Acas early conciliation).

Because it concluded that a worker’s entitlement in these circumstances continues to carry over and accumulate until termination, the Court of Appeal did not need to make any determinations regarding a claim for a series of unlawful deductions. Nevertheless, the Court did consider the principle established in the Bear Scotland v Fulton case that a gap of three or more months between deductions will break the series of deductions in an unlawful deductions claim (the so-called 'three-month break rule'). In giving what it referred to as its 'strong provisional view', the Court of Appeal agreed with a decision of the Northern Ireland Court of Appeal in 2019 (in Chief Constable of the Police Service of Northern Ireland v Agnew) which said that a series of deductions is not ended by a gap of more than three months between those deductions. This part of the Court of Appeal’s judgment is not binding and, as things stand, Bear Scotland remains binding authority for tribunals. However, the Employment Appeal Tribunal (EAT) is not bound by Bear Scotland and the Court of Appeal’s comments (together with the conclusion in the Agnew case) are likely to be persuasive. The Smith case therefore raises significant question marks over the validity of the three-month break rule.

What are the implications for employers?

The case has considerable implications for businesses facing worker status disputes - if an individual has been denied the right to paid annual leave and a tribunal determines that they are in fact a worker, they are entitled on termination of their contract to pay in lieu of potentially up to 4 weeks' leave per year for their entire engagement. Following the decision in Smith, a claim for payment in respect of carried over and accumulated holiday can now be brought by a worker who took unpaid leave in circumstances where their employer denied them the right to paid holiday.

The Smith decision therefore raises the stakes in worker status disputes. The value of these claims could be significant as an eligible worker can claim for pay in lieu of their Euro Leave entitlement of up to 4 weeks’ leave for each year of their engagement. The 2 year long-stop on unlawful deductions claims (which the Government introduced in 2015 to put a limit on how many years’ worth of underpayments a worker can claim for) will not be applicable in these circumstances.

The decision leaves open a number of unanswered questions, including the following:

• Will Pimlico Plumbers appeal to the Supreme Court? Given the significance of the issues and the potential value to many employers (particularly those facing live worker status claims), this is perhaps likely.
• What is the position for a misclassified worker who is still engaged by the employer and so does not yet have a crystallised claim to pay in lieu of carried over holiday on termination? The principles set out in the Smith case will mean that such a worker will have a significant amount of accrued but untaken holiday. There are a number of points that would need be worked through on a practical level, including how to go about providing such workers with an opportunity to take that leave, the extent to which there is an ability to introduce a 'use it or lose it' policy in respect of the backlog of leave where they have been given an opportunity to take it and how a worker still denied the right to holiday in this situation would be best to plead their claim and what time limits would apply.

For businesses who employ workers who have been provided with their entitlement to paid holiday each year, the case has less immediate impact. However, there are big question marks now over the validity of the three-month break rule. If the EAT decides to move away from that rule at the next opportunity, this could increase liability for any employers who have not adjusted their employees’ holiday pay to reflect 'normal remuneration' in line with the line of cases which require the inclusion of certain variable payments and allowances. There is some potential comfort for employers in this situation as claims brought for underpayment of holiday pay (rather than non-payment) should still be limited by the 2 year long-stop on unlawful deductions claims and a series of deductions should also be broken in situations where an employer has changed its holiday pay practices and begun to pay normal remuneration.

Takeaways for employers

If you are an employer considering the impact of this case, you should be looking to:

• audit your workforce and identify any individuals who may qualify as workers for employment law purposes. If risk areas are identified in this audit, you may want to consider whether you can make changes to your operating model to combat arguments from contractors that they may be workers or you may need to take the following steps to ensure workers receive their paid holiday entitlement;
• ensure that workers and employees are provided with the right to paid annual leave and they are paid for this holiday at the right rate (including, where this is required, taking into account variable payments to ensure a worker receives their normal remuneration whilst on leave);
• check that you have appropriate arrangements in place to provide all workers and employees with clear information about their paid annual leave entitlement and when that leave entitlement will be lost at the end of the leave year. In order to achieve this, you will need to be able to show that the employee or worker had a full opportunity to take their paid annual leave entitlement. Employers should review the provisions of their contracts of employment, letters of engagement, handbooks and policies and might also consider what reminders can be built in to holiday booking systems; and
• carry out careful due diligence into potential historic liabilities for holiday pay for misclassified workers that you inherit or that might transfer to you as part of any share purchases or TUPE transfers. You will also want to consider the provisions of your commercial contracts that deal with employment liabilities to ensure that the legal and financial risks (which could be sizeable) are properly covered.

There are a number of complex issues to unpack when it comes to worker status and holiday pay. We have extensive experience of advising businesses on these issues. If you would like more information, or specific advice, please contact Luke Bowery or another member of our Employment team.

This article was written by Katie Wooller and Luke Bowery.