Holiday pay and worker status: Can misclassified workers carry over leave that has already been taken as unpaid leave?

I appreciate that it seems impossible to go a couple of months without yet another employment status case. Last year, the Supreme Court found that Uber drivers were “workers” and this was similarly applied in respect of Addison Lee drivers, while just recently, the EAT confirmed a taxi driver working through the Mytaxi app was not a worker. We now have the Court of Appeal’s recent judgment in the case of Smith v Pimlico Plumbers Ltd which deals with the intersection between holiday pay and employment status. In a decision which will be highly significant for employers with risks of misclassification claims, the Court of Appeal concluded that whenever Mr Smith took leave and wasn’t paid for it, he carried forward the four weeks of 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.

Worker status and holiday pay in court

You may recognise the name of this case as this is not Mr Smith’s first time in front of the Court of Appeal (or indeed the Supreme Court). Mr Smith worked for Pimlico Plumbers for almost six years as a plumbing and heating engineer. Throughout this period Pimlico Plumbers treated him as a self-employed contractor and, consequently, did not provide him with paid annual leave. After he left Pimlico Plumbers, Mr Smith subsequently submitted claims to the employment tribunal for holiday pay under the Working Time Regulations for the annual leave he carried over each year until he left Pimlico Plumbers and unauthorised deductions from wages under the Employment Rights Act 1996. Pimlico Plumbers challenged Mr Smith’s employment status and this progressed through the courts. In 2017, the Court of Appeal found that, despite being described as self-employed, Mr Smith was in fact a worker within the meaning of section 230(3) of the Employment Rights Act 1996 and, therefore, was 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 (see our blog here), reminding us again that employers need to make sure that the employment status reflects the reality of the contract of the ground and employers cannot rely on the label given to the relationship by the parties.

At this stage, the holiday pay claim was returned to the employment tribunal. Following the Supreme Court decision, Pimlico Plumbers accepted that Mr Smith was entitled to paid annual leave but argued that his claim was out of time. The Tribunal and the EAT agreed that his claim was out of time, reiterating that a claim for unlawful denial of holiday pay under Regulation 16 of the Working Time Regulations or of unauthorised deductions had to be brought within three months less a day from the date Pimlico Plumbers failed to pay him. It rejected Mr Smith’s arguments that the European Court of Justice’s ruling in King v Sash Window Workshop entitled him to bring, on the termination of his engagement, a claim in respect of all accrued, unpaid annual leave throughout his engagement with Pimlico Plumbers, both taken and untaken.

As a reminder, as a general rule the four weeks’ leave provided under the Working Time Directive may only be taken in the leave year in respect of which it is due. However, the ECJ found in the case of King v Sash Window Workshop that a worker, Mr King, who had not received paid annual leave on the basis that his employer had incorrectly characterised him as self-employed, was entitled to compensation for untaken holiday which accrued throughout the employment relationship and he was entitled to carry over accrued holiday at the end of each year (our commentary on the case can be found here). The Employment Tribunal and Employment Appeal Tribunal distinguished between the decision in King v Sash Window Workshop and Mr Smith’s case by stating that King was not concerned with leave that was taken but unpaid (which Mr Smith was claiming), but, instead, it related to annual leave that was not taken because of an employer’s failure to pay for that leave and, therefore, the case did not suggest that there was a right to carry over leave that was taken.

Court of Appeal decision: the right to paid annual leave

The Court of Appeal has now reversed that decision. It found that the principles found in King could be applied to Mr Smith’s circumstances, stating that the case emphasised the importance of the right to “paid annual leave” and that it found that member states must not make “the very existence of that right…subject to any preconditions whatsoever”. The right to annual leave and the right to be paid for it are two aspects of a single right and where a worker takes annual leave but is unsure whether they will be paid for it, they will not be able to benefit from the necessary rest that the paid leave is intended to provide.

The judgment emphasised that it is a well-established principle that the right to paid annual leave cannot be lost unless the worker has had the opportunity to exercise that right before the termination of the employment relationship. Therefore, a worker can only lose the right to annual leave at the end of the leave year when the employer can meet the burden of showing that it gave the worker the opportunity to take paid annual leave, encouraged them to take it and informed them that the right would be lost at the end of the leave year. If the employer does not meet this threshold, the right to 4 weeks’ paid leave provided by the Working Time Directive does not lapse and, instead, is carried over and accumulates until the termination of the workers contract, when the worker is entitled to a payment in respect of all the unpaid leave. The Court of Appeal decision extends the decision in Sash Windows to taken but unpaid leave, as well as untaken leave. A worker’s claim will be in time if they then bring a claim for payment in respect of the breach within a period of three months from the termination date, which Mr Smith had done in this case. This decision does not apply for the additional 1.6 weeks of leave which is provided under domestic law on top of the 4 weeks’ leave provided by the Working Time Directive.

A change to how a “series of deductions” is calculated?

A further takeaway from the Court of Appeal judgement that will be key for employers is its obiter comments that it considered the decision in Bear Scotland v Fulton to be 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, Chief Constable of the Police Service of Northern Ireland and anor v Agnew and ors, 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. The Court of Appeal in Mr Smith’s case gave the “strong provisional view” that the Northern Ireland Court of Appeal was correct in Agnew and it is, in fact, a question of “fact and degree, based on the evidence, whether deductions are sufficiently similar or related over time to constitute a 'series'”. Whilst these comments are obiter only and, therefore, technically the lower courts are still bound to follow Bear Scotland, it seems likely the position will change when appealed (which Pimlico Plumbers, based on its approach to date, is likely to do).

This case acts as a further reminder to employers that they need to carefully consider the day-to-day relationships they have with self-employed contractors and re-visit this throughout the relationship to ensure that they have categorised them correctly as the cost of getting it wrong can be substantial.

If you require further information about anything covered in this blog, please contact Hannah Taylor 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, February 2022