Feb 22

Holiday Pay: misclassification of employment status and no break in a series of unlawful deductions

Written by Harjeet Nangla
Associate

DDI: 01423 726610
E: harjeet.nangla@raworths.co.uk

The impact of getting employment status wrong for your staff has never been more significant following the case of Smith v Pimlico Plumbers.

The Court of Appeal has:

• decided that a worker is allowed to carry over a right to paid holiday where in any holiday year, the employer fails to recognise a worker’s right to paid holiday and cannot show that it provides a facility for the taking of holiday. Under such circumstances, the worker will be entitled to carry forward any holiday which is taken and unpaid, or which is not taken, into subsequent holiday years; and
• expressed a ‘strong provisional view’ that a gap of more than three months in a series of unlawful deductions from wages would not break the series of deductions.

Background

Mr Smith worked as a plumbing and heating engineer for Pimlico Plumbers between August 2005 and May 2011. Pimlico Plumbers treated Mr Smith as a self-employed contractor. During his engagement Mr Smith took holiday but was not paid for it. On the termination of his engagement, Mr Smith challenged his employment status, claiming that he was in fact a worker with the right to receive paid holiday. The question of his employment status reached the Supreme Court where Mr Smith was found to be a worker and his case was then sent back to the employment tribunal to decide on the issue of holiday pay.

Under the Working Time Directive, workers have a right to four weeks’ paid holiday each leave year (commonly referred to as EU leave). The right to carry over EU leave where a worker had been denied the right to paid annual leave, was established in the case of King v Sash Window Workshop Ltd.

In the case of King, the ECJ held that a worker is entitled to be paid on termination for any periods of annual leave that have accrued during their engagement if they have been discouraged from taking that leave because it would have been unpaid. Using this rationale, Mr Smith claimed that he also had the right to carry over the right to paid holiday throughout his employment and this was payable on termination of his engagement.  The Court of Appeal agreed.  The Court of Appeal held that a worker who had taken unpaid leave, having been told they had no right to paid leave by their employer, was entitled to bring a claim for all unpaid leave for the whole period of their employment. They are also entitled to bring such a claim on the termination of their engagement. In other words, Mr Smith was allowed to claim holiday pay for the entire period of his engagement.

On a separate but related issue, the Court of Appeal was also asked to give an opinion on whether the principal established in the case of Bear v Scotland Ltd had been correctly decided. In the case of Bear it was held that where more than a gap of three months had elapsed between deductions, this would break a series of deductions and anything before the three month gap could no longer be claimed. The Court of Appeal gave a strong provisional view that this principal was incorrect and that a gap of more than three months would not break a series of deductions.

Impact

The impact of this decision for employers is significant because:

• Workers with historic claims for unpaid or untaken holiday because they were wrongly classed as self-employed contractors could now seek to bring claims for holiday pay for the whole period of their engagement. The key issue would be if the worker was denied the right to paid holiday throughout their engagement. The worker would be entitled to bring a claim on the termination of their engagement to seek a payment in lieu of their accrued and outstanding holiday entitlement. Such a claim would be for a single payment due on termination, which in turn means that the claim would fall outside of the two-year backstop liability period introduced by the Deduction from Wages (Limitation) Regulations 2014, which was introduced to limit a series of deductions going back any further than two years in respect of unlawful deductions from wages claims brought on or after 1 July 2015.
• The rulings in King and Pimlico only apply to four weeks’ EU leave.
• The worker does not need to prove that they were denied paid holiday. Instead the burden is on the employer to show that it had taken steps to enable the worker to take paid annual leave, that they encouraged them to do so and informed the worker that the right would be lost at the end of the leave year.
• While the Court of Appeal’s ‘strong provisional view’ that a gap of more than three months would not break a series of deductions in a claim for unlawful deductions from wages is not yet binding, it does have the effect of placing a big sign post on this principal saying “proceed with extreme caution”; in other words it is more likely just a question of when rather than if the principal in Bear v Scotland Ltd will be overturned.
• It seems for now that the two-year backstop liability period introduced by the Deductions from Wages (Limitation) Regulations 2014 remains unaffected and will still apply to claims relating to an unlawful deduction from wages claims where there has been an underpayment of paid holiday, that is to say where the worker has had the right to exercise holiday and has been paid holiday but the calculation of holiday pay has been incorrect.

Comment

Employers would be wise to review the employment status of their self-employed contractors to ensure that they have correctly been classified as self-employed.

For those employers that can still rely on the two-year backstop for historic holiday pay claims, they need to be alive to the fact that it will now be more difficult to further limit liability by establishing a break of more than  three months between deductions following the strong provisional view expressed by the court.

To discuss the content on this article please contact Harjeet Nangla in our Employment Law team harjeet.nangla@raworths.co.uk

Published on 15 February 2022

The information and any commentary contained in these articles is for general information purposes only and does not constitute legal advice.  If you have a particular issue you are advised to obtain specific, personal advice about your case or matter and not to rely on the information or comments in this article.