Holiday pay case study: Pimlico Plumbers

What does the recent judgement of the Court of Appeal in the Pimlico Plumbers case mean for employers?

Smith v Pimlico Plumbers Limited (Pimlico Plumbers) first caught the attention as another in a recent line of cases in which the employer sought to argue (unsuccessfully) that an individual is self-employed as opposed to being a worker or employee. In Pimlico Plumbers this question of Mr Smith’s employment status went up to the Supreme Court which ruled that he was a “worker” for the purposes of the Employment Rights Act 1996 (“ERA”) and the Working Time Regulations 1998 (“WTR”).

Workers are entitled to a minimum of 5.6 weeks’ paid holiday under the WTR and 4 weeks of this entitlement derives from the European Working Time Directive (“WTD”). Workers can raise a claim under the WTR for a failure to pay for any leave taken to which they are entitled under the WTR and for a failure to pay for any accrued untaken statutory leave on termination. Claims for holiday pay can also be raised as an unlawful deduction from wages claim under the ERA.

The most recent judgement of the Court of Appeal issued on 1 February in this case concerned the question of holiday pay and in particular, pay for the four weeks’ annual leave deriving from the WTD. As Mr Smith was not viewed by Pimlico as a worker, he had received no paid leave during his time there. He had, though, taken periods of unpaid leave. This case concerned whether Mr Smith was entitled to any holiday pay on termination of his contract, having had his status as a “worker” confirmed by the Supreme Court.

In short, the key points from the Court of Appeal’s decision are as follows:

• In order for an individual to be exercising their right to the four weeks’ holiday deriving from the WTD, they require to be paid for those holidays at the time that they are taken (i.e. taking unpaid holidays is not an exercise of that right);
• Workers may be able to carry over leave entitlement to the following leave year and accumulate a claim for payment in lieu on termination when they do not take some or all of their annual leave for reasons beyond their control, including if an employer does not recognise this right to paid annual leave.
• Before a worker/employee will lose the right to the leave at the end of a leave year, the worker must actually have had the opportunity to take paid leave. The burden will rest on the employer to show that they “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 the employer cannot meet that burden, the right 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 worker would have three months (less one day) from the date of termination of employment to raise a claim for the accrued unpaid holidays.

This decision overturned that of the Employment Tribunal and Employment Appeal Tribunal (“EAT”) which both drew a distinction between someone who does not take any leave at all and one, as in Mr Smith’s case, where leave is taken but not paid for. The Court of Appeal’s decision is essentially that this is not a distinction that can be drawn. The decision highlights one potential consequence of getting the employment status of someone working for you wrong and shows that in that situation, the person can potentially accumulate the right to paid annual leave (in respect of the 4 weeks’ leave deriving from the WTD) up until termination.

Also of note is that the Court of Appeal gave what it described as “a strong provisional view” that the decision of the EAT in Bear Scotland v Fulton that if a Claimant is raising a claim in respect of a series of deductions, if there has been a gap of more than three months (less one day) between deductions, this breaks the series, was incorrect. These comments are not binding and any Employment Tribunal remains bound by the EAT’s decision in Bear Scotland. However, when this issue reaches the EAT again or indeed falls to be considered at a higher level, there may be a departure from Bear Scotland.

The relevance is that this would remove an often useful argument for employers when seeking to break the series of deductions in an unlawful deduction from wages claim relating to holiday pay. There is, though, still legislation which prevents any unlawful deduction from wages claim in respect of statutory holiday pay going back further than two years.

This decision once again emphasises that a failure to get the employment status right of any person working for you can have significant consequences, holiday pay being only one of them. Assessing the correct employment status of a person is often not straightforward but it is something that Harper Macleod’s employment team have extensive experience in and we would be happy to assist you navigate this difficult issue.