In the case of Smith v Pimlico Plumbers Limited, the Court of Appeal considered whether a worker could claim unpaid holiday pay dating back 6 years.

Background

We’ve seen a significant amount of case law over the past 10-15 years concerning how employers should calculate holiday pay in order to comply with the Working Time Regulations 1998 (in Northern Ireland, the Working Time Regulations (Northern Ireland) 2016) (the “Working Time Regulations”) and the EU Working Time Directive and compliance with rules on unlawful deductions from wages.

The basic principle is that workers and employees are entitled to be paid their “normal remuneration” during their holidays. This includes not only basic salary, but other payments such as commission, incentive bonuses and overtime.

Self-employed contractors are not, however, entitled to holiday pay at all.

The holiday pay rules are complicated. Where employers get this wrong, workers and employees are able to bring claims under the Working Time Regulations  or for unlawful deductions from wages in order to recover any underpayments. Claims must usually be brought within 3 months of the date of the underpayment, however workers and employees in Great Britain are able to claim for a series of successive underpayments, subject to two important limitations:

1. In the case of Bear Scotland Limited and others v Fulton and others UKEAT/0047/13, the Employment Appeal Tribunal found that where more than three months have elapsed between each underpayment, this breaks the series and anything before the three-month break can no longer be claimed. So if, for example, a worker is underpaid holiday pay on 1 December 2021, 1 November 2021, and 1 January 2021, they cannot claim for the January underpayment, as this took place more than 3 months before the subsequent underpayment in the series and the “chain” is therefore broken.

2. Under the Deduction from Wages (Limitation) Regulations 2014, claims for unlawful deduction of wages can only date back a maximum of 2 years from the date of the last underpayment. So if, for example, a worker is underpaid their holiday pay each month for the past 6 years, they can only claim for the most recent 2 years’ of underpayments – the rest is not recoverable.

However, these limitations were thrown into doubt by the European Court of Justice (ECJ) in King v The Sash Window Workshop Limited and another C-214/16 (known as the “Sash Windows” case). The ECJ in this case held that where claimants are prevented from taking annual leave (in this case, because the employer had wrongly categorised the Claimant as self-employed and therefore informed the Claimant that he was not entitled to take paid leave), claimants can claim for an indefinite period of unpaid annual leave.

This decision was significant because it opened the door to potentially unlimited claims for backdated holiday pay and it cast doubt on whether Bear Scotland had been correctly decided and whether the Deduction from Wages (Limitation) Regulations 2014 were compatible with EU law (which was automatically transposed into UK law following Brexit).

In Northern Ireland, the position has been further complicated following a decision by the Court of Appeal in Chief Constable for the Police Service of Northern Ireland & Others v Alexander Agnew & Others [2019] NICA 32, which overruled Bear Scotland and held that a gap of more than 3 months would not break a series of deductions. Instead, identification of the factual link in an alleged series of deductions is what determines whether correct payments of holiday pay breaks the series.

The 2-year backstop’ on claims for unlawful deduction from wages was also never introduced in Northern Ireland (where employment law is a devolved matter), meaning that workers and employees in Northern Ireland can potentially claim for an indefinite period of deductions, provided they can establish an unbroken series of deductions.

The Pilmlico case

Gary Smith worked for Pimlico Plumbers Limited (“Pimlico”) from August 2005 until May 2011. Pimlico treated Mr Smith as self-employed, and therefore not entitled to paid annual leave. Mr Smith nevertheless took periods of leave from time to time, but this was always unpaid.

Mr Smith brought a claim in the Employment Tribunal claiming that he was, at least, a worker and therefore entitled to paid annual leave throughout his engagement with Pimlico.

In 2018, the Supreme Court found that Mr Smith was a worker and so the case was subsequently sent back to the Employment Tribunal to determine whether Mr Smith could claim compensation for the holiday pay he was not paid throughout his engagement with Pimlico.

Both the Employment Tribunal and Employment Appeal Tribunal dismissed Mr Smith’s claim for unpaid holiday pay. The Tribunals found that the Sash Windows exception did not apply in this case because Mr Smith had actually taken holiday, unlike Mr King in the Sash Windows case who did not, and so it could not be said that he was prevented from taking annual leave.

Therefore, following Bear Scotland, he had three months from the last of a series of underpayments to bring his claim, and there could not be a gap of more than 3 months between each successive underpayment. Applying these rules, his claim was out of time and he had lost the ability to recover all the unpaid holiday pay during his engagement with Pimlico.

Not content with the decisions of the Employment Tribunal and the Employment Appeal Tribunal, Mr Smith appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal unanimously reversed the decisions of the Employment Tribunal and Employment Appeal Tribunal.

The Court of Appeal held that the Sash Windows exception did in fact apply to Mr Smith’s case and it didn’t matter that he had actually taken annual leave.

The Court stressed that all workers are entitled to paid annual leave and workers would only lose this right at the end of each leave year where employers could show that they:

  • specifically and transparently gave the worker the opportunity to take paid annual leave,
  • encouraged them to take it, and
  • informed the worker that the right would be lost at the end of the leave year.

If the employer cannot meet this burden, the right to paid annual 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 all unpaid leave.

As Mr Smith had been wrongly categorised as a worker and therefore (also wrongly) told that he was not entitled to paid holiday, Pimlico could not discharge the above burden, and therefore Mr Smith could claim for unpaid leave during his entire engagement up until termination; his claim was not out of time.

Based on the above, the Court of Appeal also gave its provisional view that Bear Scotland was wrongly decided and there should not be a 3-month break rule. As explained above, the Northern Ireland Court of Appeal shared this view in the Agnew case, and it remains to be seen if a further appeal to the Supreme Court will in fact proceed and whether Bear Scotland will formally be overturned across the entire United Kingdom.

Comment

This is a significant decision. It is not uncommon for employers to wrongly classify its staff as self-employed: it is a complex and constantly shifting area of law. For example, most readers will be aware of the Uber case, in which the Supreme Court held that Uber drivers were workers, and not self-employed as Uber claimed they were.

The Pimlico case confirms that this can be an expensive mistake and where workers are not afforded the opportunity to take paid leave as a result, they can claim holiday pay for an indefinite period. For one worker alone, this could lead to significant compensation being claimed, but it could be even more significant if numerous workers club together to bring a “class action” claim.

Although this decision may well be appealed to the Supreme Court, employers would nonetheless be wise to conduct an employment status audit on its workforce to ensure that its staff are being correctly  categorised as “employee”, “worker” or “self-employed”. It would also be prudent to conduct a holiday pay audit to ensure that holiday pay is being calculated correctly for all workers and employees, taking advice as necessary.

Finally, all workers and employees should be fully informed about, and encouraged to exercise, their right to paid holidays.

A link to the full judgment can be found here: https://www.bailii.org/ew/cases/EWCA/Civ/2022/70.pdf

Contributor: John Smith

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

02 February 2022

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