Smith v Pimlico Plumbers: A significant decision on workers and holiday pay
In this long running and high profile case, the Court of Appeal has held that a worker who had been denied paid holidays because he had been wrongly classified as self-employed was entitled to a payment in respect of all holiday that had accrued throughout his entire period of service.
Background
Gary Smith was a plumber and heating engineer who worked for Pimlico Plumbers from 2005 to 2011. He was considered by Pimlico Plumbers to be an independent contractor and, as such, didn’t receive any holiday pay for the entire 6 year period that he worked for the company, although he did take periods of unpaid leave.
After succeeding in establishing that he was a worker in 2018, Mr Smith turned his attention to pursuing a claim against Pimlico Plumbers for outstanding holiday pay. He claimed that he was entitled to 4 weeks’ (20 days) pay for each year he had worked for the company.
The European Working Time Directive (“WTD”) provides that the four weeks’ (20 days) entitlement provided by the legislation may only be taken in the leave year to which it relates and should not be carried forward. The WTD also states that, upon termination, a worker is entitled to receive a payment in lieu of any untaken statutory holiday that has accrued during their final year of work only.
Mr Smith relied on the European Court of Justice case of King v Sash Windows. In this case, Mr King had been told by Sash Windows that he was only entitled to take unpaid leave because they (wrongly) believed he was not a worker. In the ECJ’s opinion, this had deterred Mr King from exercising his right to take annual leave and it was held that his untaken leave entitlement had to be carried over indefinitely until the termination of his engagement. It was held that to place a limit on the amount of leave that could be carried over would result in the loss of Mr King’s annual leave rights.
Although Mr Smith attempted to draw parallels between his circumstances and Mr King’s case, both the Employment Tribunal and the Employment Appeal Tribunal rejected his claim on the basis that the principles in the King v Sash Windows case did not apply to him. They held that the cases could be distinguished because Mr Smith’s case related to leave he had actually taken but had not been paid for, whereas Mr King had been deterred from actually taking annual leave in the first place by being told that he wouldn’t be paid for it. Mr Smith subsequently appealed to the Court of Appeal.
The Court of Appeal decision
Mr Smith’s appeal has succeeded. The Court of Appeal has held that the principles in King v Sash Windows applied to both: (i) leave that has been taken but has not been paid (as per Mr Smith); and (ii) leave that was not taken at all where the worker has been denied the right to paid annual leave (as per Mr King).
In both cases, the misclassification of employment status denied the individuals their right to paid annual leave. As such, it was held that Mr Smith was entitled to backdated holiday pay that had accrued over the entirety of his six year engagement, understood to amount to over £74,000.
The Court of Appeal held that a worker could lose their right to take leave at the end of the leave year (in a case where the right to paid leave is disputed and the employer refuses to remunerate it) but only where the employer can meet the burden of showing that it:
specifically and transparently gave the worker the opportunity to take paid annual leave;
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 if it was not used.
If the employer is unable to meet this burden, the right to paid leave will not lapse and will instead carry over and accumulate until the termination of the worker’s engagement. At the point of termination, the worker would then be entitled to a payment in respect of the untaken leave.
Finally, whilst not the focal point of this case, in handing down its judgment the Court of Appeal went on to make some non-binding comments regarding the correct operation of unlawful deduction from wages claims. These comments cast doubt on whether it is still good law that a gap of more than three months between one underpayment or non-payment of holiday pay and the next one will time-bar any claims further back in time. As these comments are non-binding, it is not yet clear if employment tribunals will be prepared to follow them but we expect a Supreme Court decision on this issue shortly which will be binding on other courts in the UK.
Implications for employers
There have been several high profile cases recently (particularly within the gig economy) where “self-employed contractors” have successfully challenged their self-employed status and have been held to be workers and therefore entitled to holiday pay. This Court of Appeal decision adds to this line of cases by finding that where individuals have been misclassified as being self-employed, they could be entitled to significant payments in respect of annual leave dating back a number of years.
For claims brought under the Working Time Regulations 1998 (“WTR”), the decision effectively sweeps aside the two-year limit that applies on any back payments for claims lodged post July 2015. The entitlement to paid annual leave carries over and crystalises on termination so that, as long as a claim is brought under the WTR within three months of termination, the worker can claim back pay for the whole period when they have been denied the right to paid holiday (or to 1998, when the WTR were introduced).
It is important to note that Mr Smith’s appeal only concerned his entitlement to the four weeks’ leave derived from EU law and not the additional 1.6 weeks’ entitlement 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 may be substantial.
This case emphasises the value in employers carrying out an internal audit of their existing contractor arrangements to carefully assess the risk of individuals being deemed, in employment terms, to be workers or employees and therefore entitled to backdated holiday pay (together with additional employment law rights). Given the Court’s comments in relation to when a worker will lose their right to take leave at the end of the leave year, we recommend that employers actively encourage their employees and workers to: (i) know what their annual leave entitlement is and when they can take it; (ii) in good time before the end of the leave year, ensure they are encouraged to take any unused leave; and (iii) remind them that they will lose any untaken entitlement. These steps will assist employers in determining their potential exposure to holiday pay claims and help to mitigate the risk of significant historic holiday pay liabilities. Employers should also consider these potential liabilities in the context of business acquisitions on the basis that a purchaser could inherit significant financial risk if the seller has existing working relationships with individuals who it has mislabelled as self-employed.
Please contact the team at Synchrony Law if you require any further advice in this area or you require support on any other employment law matter.