Court of Appeal decision on holiday pay: where does it leave employers?

The facts

Mr Smith worked for Pimlico Plumbers for almost 6 years, during which time he was classified as a “self-employed independent contractor” and not entitled to take paid annual leave. Mr Smith had taken periods of leave during his engagement, but it was always unpaid. In 2018, the Supreme Court held that Mr Smith had worker status, rather than being self-employed, and that he was entitled to 5.6 weeks’ paid leave per year.

Mr Smith’s holiday pay claim returned to the Employment Tribunal to decide how much he was owed for unpaid holiday. In his claim, Mr Smith sought to rely on the European Court of Justice Decision in King v The Sash Window Workshop Ltd, which he argued entitled him to claim compensation for all unpaid annual leave during the period of his engagement. The EAT held that the decision in King only applied if the worker had taken no holiday at all (rather than having taken the leave but not been paid for it, as was the situation for Mr Smith). The EAT also held that any claim had to be made within 3 months of the last period of holiday Mr Smith had taken, and it didn’t carry over until the end of his engagement. Mr Smith appealed the decision.

The Court of Appeal upheld Mr Smith’s appeal. It found that although the factual context of Mr King’s claim was different (which related to untaken leave), it can be read as extending to workers who have taken leave but have not been paid for it, as was the case for Mr Smith. The Court of Appeal also found that, as in King, for each year that Mr Smith took unpaid holiday, four weeks of the leave (which is the leave under the European Working Time Directive “Euro-leave”) could be carried forward until the end of his engagement. It held that the right to paid annual leave cannot be subject to any preconditions and a failure by the employer to remunerate leave when taken, is a failure to ensure the necessary rest and relaxation that goes with paid annual leave.

The ability to carryover Euro-leave until the end of the engagement is significant. In its judgment, the Court of Appeal gave a “strong provisional view” that the key decision on holiday pay claims and deductions from wages, the EAT decision in a case named Bear Scotland v Fulton, which held that a three-month break in the series of deductions breaks the chain, was wrong. The comments are not binding, because Mr Smith did not rely on a deduction from wages claim instead, he brought a claim under the Working Time Regulations, however the comment will be persuasive.

Implications for employers

• This decision means that workers may have claims for four weeks’ holiday pay per year, starting from when their engagement commenced and crystallising on termination. This is likely to impact, in particular, the gig economy where individuals have been able to argue they have been misclassified as self-employed and denied holiday rights. If the individuals are successful in such arguments, they can bring holiday pay claims on termination going back many years, which may amount to significant liabilities for companies. Considering these potential liabilities, employers should consider auditing their workforce to identify any independent contractors who may claim to be workers and to consider action going forward (will they receive paid holiday entitlement or will changes be made to how the individual operates to try to strengthen their “self-employment status”).
• Significant potential liabilities are likely to raise concerns in corporate acquisitions and should be covered in due diligence processes and appropriate provisions included in relevant documentation. Employers may also need to consider how this decision impacts on existing holiday pay claims, in particular the potential liabilities at play.
• As the Judgment sets out, employers will need to be able to show “specifically and transparently” that the worker was given the opportunity to and encouraged to take paid annual leave and informed that the right would be lost at the end of the year”. Employers should consider reviewing holiday policies, employment contracts and relevant communications with staff in light of this Judgment.
• It’s important to note that this decision only applies to the four weeks Euro-leave not the additional 1.6 weeks of leave under the UK’s Working Time Regulations nor contractual holiday on top of this. Employers should also note that the two-year backstop is still in place for deduction from wages claims i.e., in circumstances where an employer has failed to include regular overtime and commission in holiday pay claims. A reminder to employers to check that both workers and employees are provided with the right to paid holiday and that they receive the correct amount of remuneration whilst on leave.
• We will wait to see whether this important decision is appealed and if we get more clarity over the Bear Scotland decision as to whether a break of three months between deductions from wages, breaks the chain.

Holiday pay is a tricky topic and one that can be costly for employers if not properly dealt with. If you have any questions on the topics in this alert please contact Paul Reeves, Leanne Raven or your usual Stephenson Harwood contact.