Holiday Pay & Miscategorising Workers As Self-Employed
Key Contact: Claire Knowles
Author: Conrad Hazlitt
Recently, in the case of Smith v Pimlico Plumbers , the Court of Appeal upheld part of Mr Smith’s appeal concerning his entitlement to holiday pay in his long-running legal battle with Pimlico Plumbers. The ruling could have a significant impact on employers who engage so-called “self-employed contractors” and on employers’ obligations to ensure that their workers have every opportunity to take their paid holiday entitlement.
Relevant Legal Background
- Where a worker’s employment terminates, their employer is required to pay the value of any accrued statutory holiday that has not been taken during the holiday year in which their employment is terminating (known as making a ‘payment in lieu of holiday’).
- Where a worker has had every opportunity to take their paid holiday entitlement, any untaken will not carry over to the subsequent leave year and will be lost. This explains employers’ general ‘lose it or use it’ attitude to paid holiday leave. However, where paid leave has not been taken because the employee has been denied the opportunity to take their paid leave, it will carry over to a subsequent leave year. The burden of proof is not on a worker to prove that they have been denied paid leave, but in fact on the employer to show that it has “exercised all due diligence in order to enable the worker to take the paid annual leave to which [they are] entitled”.
- In the case of King v Sash Window Workshop Ltd , the European Court of Justice established that a worker is entitled to be paid in lieu of any accrued untaken holiday on termination, where that leave went untaken because the worker was discouraged from taking it having believed that it would be unpaid.
Mr Smith worked for Pimlico Plumbers as a plumbing and heating engineer between August 2005 and May 2011. Mr Smith’s contract stated that he was a self-employed independent contractor, but Mr Smith contested this and brought several claims that relied on him being classified as a ‘worker’ under Employment Law. In 2018, the Supreme Court ruled that Mr Smith was indeed a worker and that he was thereby entitled to pursue many of his various claims. One such claim for unpaid holiday pay. Mr Smith claimed unpaid holiday reaching back 5 years.
Unlike in the King case, where Mr King had not taken his paid holiday as he was discouraged from taking it having believed that it would be unpaid, Mr Smith had in fact taken leave throughout his engagement. However, as his contract purported that he was self-employed (and thereby not entitled to paid leave), the leave that he did take was unpaid.
The Court of Appeal considered various legal issues. The one which we are concerned with here is whether Mr Smith was entitled to be paid the value of his accrued leave in lieu on termination (going back five years), notwithstanding the fact that he took unpaid leave throughout the course of his engagement. In other words, does a worker have to have not taken leave to benefit from the King decision, or does the King decision also apply to workers who took unpaid leave?
The Court of Appeal found in favour of Mr Smith.
The Court of Appeal referred to King and the European Court of Justice’s reasoning in that case that the right to annual leave and the right to a payment on that account were two aspects of a “single right”, not two distinct entitlements. The Court of Appeal concluded that the reasoning in King covers not only workers who do not take leave because it would be unpaid (like in King), but also workers who take unpaid leave because the employer (wrongly) refuses to recognise their right to paid leave, as in Pimlico. The Court of Appeal emphasised that:
- the taking of unpaid leave could not discharge an employer’s obligation to provide its workers with paid leave.
- where a worker has been denied the right to paid leave throughout their employment, the right to paid leave accumulates from year to year and “crystallises” on termination.
This decision will be important for many workers with historic claims for unpaid or untaken holiday.
The key point is that, where a worker has been denied the right to paid leave throughout their employment, the right to paid leave under the Working Time Directive accumulates from year to year and crystallises on termination. This will have implications for a worker regardless of whether they don’t take leave at all or whether they take unpaid leave only, provided their employer’s approach in effect denied that worker the right to paid leave. Perhaps most importantly for litigation purposes, this would not be a series of deductions claim but a claim for a single payment due on termination, meaning that the limitation rules on a series of deductions claim and the ‘Bear Scotland 3-month gap’ will not limit a worker’s potential entitlement to unpaid holiday under this principle.
Businesses who treat individuals as self-employed contractors now have even more reason to take legal advice on whether that is the correct clarification in light of this decision. Meanwhile, businesses who recognise their staff as ‘workers’ now have more reason to take steps to ensure that they are encouraging their workers to take paid holiday so that they are discharging their ‘burden of proof’.
As the King decision was decided by the European Court of Justice, this decision only concerns a worker’s entitlement to the four weeks’ paid leave under the Working Time Directive (known as the so called ‘EU holiday”) and not the additional 1.6 weeks’ leave entitlement under the domestic Working Time Regulations 1998. It is therefore worth drafting contracts and policies to make clear that the employee/worker will use up their 4 weeks ‘EU holiday’ first.
It’s worth noting that King and Pimlico only applies to cases in which the employer denied the right to paid holiday altogether. Workers who claim to have been underpaid their holiday pay are unaffected by this decision and so will still be bound by the limitation rules and ‘Bear Scotland 3-month gap’ on a series of deductions.
Holiday pay is notoriously complex. If you need any assistance with the issues raised in this article, please do not hesitate to get in touch with the Acuity employment team.