Important Court of Appeal decision on historic holiday pay entitlements for workers: Smith v Pimlico Plumbers Limited [2022] EWCA Civ 70

As a result of this significant Court of Appeal (CA) decision, employers are potentially vulnerable to claims by workers for pay in respect of up to 4 weeks’ paid leave for every year worked without limitation, where such leave has been taken but not paid.  Until now the position confirmed by the Court of Justice of the European Union (CJEU) in King v Sash Window Workshop Ltd was taken to limit this principle to leave which had not been taken, but this decision extends the principle to cover leave taken by the worker for which payment has not been made by the employer and Mr Smith’s claim for £74,000 of holiday pay succeeded.

Although Mr Smith’s claim was brought before Brexit and it is based on principles derived from EU law relating to health and safety, the terms of the UK’s withdrawal agreement with the EU coupled with the CA’s reasoning means that it has ongoing significance for businesses.  The decision is especially relevant for employers with workers who may be incorrectly categorised as self-employed as they will now be able to claim for holiday pay for the entire period of their engagement, irrespective of any unpaid leave they may have taken during this time.

Businesses should be considering what exposure they may have to historic holiday pay claims and what steps they can take to mitigate this risk. 

Background

This decision is the latest in the long-running claim brought by Mr Smith, a plumbing and heating engineer, against his former employer, Pimlico Plumbers Limited (PP).  Before this case, he had established in the Supreme Court that he was a worker for the purposes of the Working Time Regulations 1998 (WTR) and the Employment Rights Act 1996 (ERA) and not an independent contractor as claimed by PP, please see our previous article here.

Given its position that Mr Smith was not a worker under the WTR, PP had asserted throughout his engagement that he was not entitled to paid annual leave.  Mr Smith had routinely taken leave on an unpaid basis.  After his engagement terminated, he claimed for unpaid holiday entitlement due to him under the WTR during this engagement.   

The Employment Tribunal and the Employment Appeal Tribunal found against Mr Smith on the basis that he had not actually pleaded a claim for payment in lieu of accrued but untaken leave on termination; his claim for holiday pay in respect of leave he had already taken was out of time; and there was a gap of more than three months between any alleged deductions contravening the principle outlined in Bear Scotland Limited and others v Fulton and others UKEAT/0047/13.  Further, both tribunals held that the CJEU’s decision in King only applied to claims for holidays which the worker was refused or deterred from taking because they were unpaid, which did not apply to Mr Smith since he had taken unpaid leave. 

What did the Court of Appeal say?

It was held that Mr Smith could recover compensation for all the unpaid leave he had taken throughout his engagement as a worker because the principles established in King give workers a singular, indivisible right to ‘paid annual leave’.  The CA emphasised that this is a right to both pay and to leave.  Accordingly, if a worker takes unpaid leave where the employer disputes the right and refuses to pay for the leave, the worker is not exercising the right.   

Adopting the tone of the CJEU in King, the CA made it clear that employers have a burden of showing they have given the worker the opportunity to take paid annual leave and encouraged them to take it.  If the employer cannot meet that burden, the right to paid leave does not lapse but carries over and accumulates until termination of the contract, at which point the worker is entitled to a payment in respect of the untaken leave. 

A further aspect of the case which was discussed in obiter (and therefore not binding) related to the position on a series of deductions. The CA expressed the ‘strong provisional’ view that the EAT in Bear Scotland was wrong to hold that a gap of more than three months between deductions prevents the forming of a 'series' for the purposes of a wages claim under s.23 ERA.  They indicated that they preferred the alternative view of the Northern Ireland Court of Appeal in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others [2019] NICA 32 that a series is to be determined based on there being a sufficient factual and temporal link between any deductions, without the need to restrict this to underpayments that are no more than 3 months apart.

What does this mean in practice for employers?

The decision makes clear that the principles in King extend to workers who have taken annual leave but have not been paid for it.  Claims for payment in respect of both untaken and taken leave that is unpaid will therefore accrue throughout a worker’s engagement until he or she is afforded the opportunity to take such leave and will, unless afforded before then, crystallise on termination.
 
It is important to note that the CA’s decision only applies to the four weeks’ leave derived from EU law and not to the additional 1.6 weeks provided in the UK by the WTR.  However, even on this basis, the cost implications for employers that are heavily reliant on a contingent workforce or the gig economy more broadly may be substantial.  Employers should review their existing contractor arrangements carefully to assess the level of risk with regard to any historic holiday pay entitlements. 

Employers should also consider these potential holiday pay liabilities in the context of business acquisitions.  Purchasers may inherit significant financial risk if the seller has existing working relationships with individuals who it has labelled as independent contractors but who are in practice workers or employees.   

Although not binding, the obiter comments of the CA clearly indicate a preference for the Northern Ireland Court of Appeal’s approach in Agnew over the EAT’s approach in Bear Scotland as regards how a series of deductions is established.  As such, they are highly likely to be persuasive in future litigation.  Employers who are still not calculating holiday pay for existing employees and workers correctly should review their position carefully in light of this decision as they now could face increased historic liabilities, subject to the two-year limitation period for holiday pay claims brought after 1 July 2015. 

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