Misclassification of workers as self-employed contractors and the impact on holiday pay entitlement

A recent case dealing with employment status and holiday pay could be highly significant for schools. The implications of the case will be relevant if schools apply the wrong employment status to someone who works for them. For schools, the people most likely to be at risk of misclassification are sports coaches, visiting music teachers, exam invigilators and, depending on the activities of the school in question, potentially others including cleaners and gap year students.

The case in question is Smith v Pimlico Plumbers Ltd. The case has been working its way through the courts for a number of years. The key historic finding for the purposes of this article is that in 2017, the Court of Appeal found that, despite being described as self-employed during his time with Pimlico Plumbers, Mr Smith was in fact a worker and was therefore entitled to worker rights such as holiday pay and protection against unlawful deductions from wages. This decision was upheld on appeal to the Supreme Court.

The focus of this article is the recent judgment of the Court of Appeal, which concluded that whenever Mr Smith took leave and was not paid for it, he carried forward the four weeks of paid leave required under the Working Time Directive into the next holiday year. This continued to accumulate until termination, when he was entitled to be paid in lieu of the accrued holiday. Our detailed summary of the case can be accessed here.

The Court of Appeal’s recent finding illustrates the potentially substantial costs if a school applies the wrong employment status to an individual working for them. Prior to this decision, schools and other employers will have taken some comfort from the fact that case law suggested that this sort of claim under the Working Time Regulations 1998 only applied in more extreme circumstances. For the purposes of the other type of claim for holiday pay (an unlawful deduction from wages claim), schools would also have taken comfort from case law suggesting that a gap of more than three months between deductions from wages prevents the deductions forming part of a “series” of deductions. Although the case has not overturned this latter finding, it has cast doubt on whether it is correct and thereby increased the likelihood of it being overturned if Pimlico Plumbers is appealed.

We have summarised below the key takeaways for schools from this case, together with a reminder on holiday pay in light of the ongoing Harpur Trust litigation.

Key takeaways

1. The label given to the relationship between an individual and a school is not the determining factor of status. The most important factor is the reality of the relationship on the ground.
   
   
2. Schools must carefully consider their day-to-day relationships with self-employed contractors, both at the outset of and regularly during the relationship to ensure that they have categorised them correctly, as the cost of getting it wrong can be substantial.
   
   
3. Where a worker has been misclassified as an independent contractor throughout their employment, Smith v Pimlico Plumbers confirms that if the employer cannot show that it gave the worker the opportunity to take paid annual leave, encouraged them to take it and informed them that the right would otherwise be lost at the end of the leave year, then the right to four weeks’ paid leave provided by the Working Time Directive does not lapse. Instead, it is carried over and accumulates until the termination of the worker’s contract, at which point the entitlement crystallises and the worker is entitled to a payment in respect of the unpaid leave by the employer. For limitation purposes, this is not a series of deductions claim, but a claim for a single payment due on termination.
   
   
4. Schools should also look out for an appeal by Pimlico Plumbers, given the potential significance of the obiter comments of the Court of the Appeal during the case. The Court noted its “strong provisional view” that the decision in Bear Scotland v Fulton is incorrect. As a reminder, in Bear Scotland it was held that a gap of more than three months between deductions from wages prevents the deductions forming part of a “series” of deductions. A subsequent Northern Ireland Court of Appeal case reached the opposite conclusion, finding that there was nothing within the legislation which imposes a limit on the gaps between particular deductions making up a series. Based on their approach to date, Pimlico Plumbers are likely to appeal the Court of Appeal’s decision. If they do and the Supreme Court agrees that Bear Scotland is incorrect, liability for unpaid holiday pay could potentially cover the totality of the individual’s engagement with the school, regardless of whether there have been breaks of three months or more in deductions. This is relevant to the potential ability of an individual to claim historic underpayments for holiday, even where the school has since sought to rectify the position moving forward.

A reminder on holiday pay – Harpur Trust

Update July 2022: the Supreme Court has handed down judgment in the case of Harpur Trust v Brazel and upheld the decision of the Court of Appeal, confirming that paid holiday for part-year workers cannot be pro-rated (for more information on the Supreme Court decision see our blog here).

Schools will be aware of the Court of Appeal’s decision in Brazel v Harpur Trust in 2019, which confirmed that term-time only (or part year) workers’ holiday entitlement is 5.6 weeks and that their holiday pay should be calculated by taking their average pay over the previous 52 weeks immediately before the leave is taken.

That decision was appealed by the Harpur Trust and the Supreme Court heard the case in November 2021. The Court has not given an indication of when its judgment will be handed down, but we would expect that it is likely that this will happen in the first half of this year.

In the meantime, to the extent that you have not already done so, you should carry out an audit of term-time only employees/workers who have been underpaid holiday pay and notify your insurers of the liability. For a more detailed explanation of steps you should be taking, please see our blog on the Court of Appeal’s judgment.

If you require further information about anything covered in this briefing, please contact Alice Yandle, Tabitha Juster or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2022