Over the last few years, the regulatory landscape regarding workers’ annual leave entitlements has been in a state of constant flux.

A number of cases have been brought against employers, and the most recent to take place was at the start of February in the Court of Appeal. This particular case decided the thorny issue of employment status, and the ruling is likely to have employers paying attention.

In simple terms, Smith v Pimlico Plumbers dealt with two questions – whether an individual who had successfully argued that he was a worker rather than self-employed could claim for outstanding holiday pay when he took leave but was not paid for it; and, if so, how far back could he claim outstanding holiday pay for.
This judgment could cause employers a headache.

Delving into the background 

Smith v Pimlico Plumbers has been ongoing for several years. In essence, Gary Smith, a plumber and heating engineer, worked for Pimlico Plumbers between 2005 and 2011. 

He was considered by Pimlico Plumbers to be an ‘independent contractor’ and, although employment status can be a legally grey area, it is an agreed principal that a genuine self-employed contractor is not entitled to holiday pay.

Smith therefore did not receive any holiday pay during the time he worked for Pimlico Plumbers. When he did take holidays, it was as unpaid leave.

He resigned in May 2011 and, in a legal claim that went all the way to the Supreme Court, he successfully established that for the period he worked for Pimlico Plumbers he had been a ‘worker.’ 

Having established his worker status, Smith sought payment of his outstanding holiday pay.

This separate case reached the Court of Appeal, which, at the beginning of February, found that leave that had been taken but not paid (as per this case), and leave that was not taken at all where the worker has been denied the right to paid annual leave (as in a previous case, King v Sash Windows) were essentially two sides of the same coin. The court said that, in both cases, the misclassification of employment status had denied the individuals their right to paid annual leave.

It also found that Smith was seeking a claim under the Working Time Regulations. This meant that upon the termination of his employment, his entitlement (and claim) to holiday pay crystallised, and the three month statutory deadline for bringing a claim commenced from the date of the termination of his engagement. His claim was therefore deemed in time, and valid.

As such, the appeal judges ruled that Smith was entitled to backdated holiday pay, said to amount to over £74,000, accrued over his entire six year service. The next step, subject to the judgment being appealed to the Supreme Court, will be for an assessment of damages.

Potentially huge implications

This is a significant decision on the issue of holiday pay for several reasons.

The case will be particularly significant to employers who engage individuals who are treated and labelled as self-employed, but who may actually be workers or employees. The general risk of a claim that the individual was actually a worker or an employee is now compounded by the risk of a legacy claim for holiday pay. It is no defence that the employer honestly believed that the individual was not legally a worker. 

The government enacted a two year backstop on unlawful deduction of wages claims in 2014. Smith’s holiday pay claim was brought before this legislation came into force – and, indeed, it was the case that his claim was brought under the Working Time Regulations – so this newer piece of legislation was not directly relevant to Smith. 

However, the court stated that damages for Working Time Regulation claims will not be subject to the two year limit. If the claim is brought under the Working Time Regulations, and within three months of termination, the worker can therefore claim back pay for the whole period of their employment. 

Employers mitigation

The Court of Appeal stated that a worker can lose the right to take leave at the end of the leave year, but only where the employer can prove that it specifically and transparently gave the worker the opportunity to take paid annual leave, it encouraged the worker to take paid annual leave, and informed the worker that the right would be lost at the end of the leave year.

This judgment confirms that if an employer cannot demonstrate that they have taken these steps, the right to paid leave does not lapse. Instead it carries over and accumulates until the contract terminates, at which point the worker will be entitled to a payment in respect of the outstanding leave. 

It also goes without saying that undertaking a review of any self-employed contractors to assess whether there is any risk as to whether they could be deemed a worker is a reasonable approach for employers. 

Unfortunately, however, employment status is an area of law which is also fraught with danger, so the recommendation is to seek clear legal advice.