Employment status is fraught with danger, says Adam. Those in a position where employment rights are under scrutiny ought to take good legal advice before acting or before a response is time barred.

OVER the past few years, the landscape regarding workers’ annual leave has been in a state of constant flux. Several cases have been brought against employers and the most recent, at the start of February (2022), in the Court of Appeal, is yet another. This particular case decided the thorny issue of employment status and the ruling is likely to have employers paying attention – especially those where not everyone ‘working’ for a company is classed by a company as an employee.

In simple terms, Smith v Pimlico Plumbers dealt with two questions – whether an individual who 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, says Suzanne Wrench, an associate solicitor at ESP Law, could cause employers a headache – especially those that use subcontractors.

Delving into the background
As Wrench outlines, Smith v Pimlico Plumbers has been an ongoing for several years: ‘In essence, Gary Smith was a plumber and heating engineer who worked for Pimlico Plumbers between 2005 and 2011. He was considered by Pimlico Plumbers to be an ‘independent contractor’ and while employment status can be a legally grey area, it’s an agreed principal that a genuine self-employed contractor is not entitled to holiday pay.’

She explains that Mr Smith didn’t receive any holiday pay for the time he worked for Pimlico Plumbers although he did take periods of 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’d been a ‘worker’.’

Having established his worker status, Smith then sought payment of his outstanding holiday pay.
Turning to legislation, Wrench says the working time directive gives workers the right to four weeks’ (20 days) paid annual leave per year. In the UK, the working time regulations tops this up to 5.6 weeks with the inclusion of eight bank holidays.

She adds that ‘workers whose rights to paid leave are denied, or whose holiday pay is incorrectly calculated, can bring a claim for an unlawful deduction of wages within three months of the last of a series of deductions’. That said, the Deduction from Wages (Limitation) Regulations 2014 sets a two-year limit on any back payments for claims lodged post July 2015.

Workers can also bring a claim under the Working Time Regulations within three months of the breach.

‘In the case,’ says Wrench, ‘Smith claimed he was entitled to four weeks (20 days) pay, relating to each year he worked for Pimlico Plumbers.’ She says this was a ‘significant challenge’ because the employment tribunal and the employment appeal tribunal considered Smith had brought his claim in August 2011 for unpaid holiday outside of the relevant three-month period, given that the last incident of unpaid holiday was alleged to have taken place in early 2011.

‘It’s also important,’ adds Wrench, ‘to recognise that the working time directive states the four weeks (20 days) may only be taken in the leave year when it is due and shouldn’t be carried forward.’ Notably, the legislation also states that upon termination of their employment, a worker is entitled to paid in lieu of unused statutory holiday from their final leave year only.

So, Smith’s arguments directly attacked these legal principals. He wasn’t the first to make this challenge, however.

Another decision
Wrench refers to the 2017 case of King v Sash Windows, which was heard by the European Court of Justice. She summarises the case: ‘Mr King had been told by Sash Windows that he was only entitled to take unpaid leave because they (wrongly) believed he wasn’t a worker. In the court’s opinion, this deterred King from exercising his right to take annual leave and the result was untaken leave entitlement had to carry over until the termination of his employment. To place a limit on what could carry over would result in the loss of King’s rights. As such, the accepted legal position had already been sightly eroded.’

Smith drew parallels with King’s case, but the employment tribunal and the employment appeal tribunal were unsympathetic. They rejected his claim on the basis that the principles in King v Sash Windows didn’t apply to him – ‘mainly,’ says Wrench, ‘because Smith’s case related to leave he had actually taken but not been paid for, whereas King had been deterred from taking annual leave at all because he was informed it would be unpaid’.

Smith appealed to the court of appeal, which disagreed with previous decisions and upheld his appeal. It found the principles in King v Sash Windows did apply to both cases.

As Wrench explains: ‘The court found leave had that been taken, but not paid (as in Smith); and that leave that wasn’t taken at all where the worker has been denied the right to paid annual leave (as in King) were essentially two sides of the same coin and in both cases, the misclassification of employment status had denied the individual’s their right to paid annual leave.’

To this Wrench adds the court also found Smith was seeking a claim under the working time regulations, meaning ‘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 Smith was entitled to backdated holiday pay, said to amount to more than £74,000 accrued over his entire six years’ service. The next step, subject to the judgment being appealed to the Supreme Court, will be for an assessment of damages.

Potentially huge implications
Understandably, in Wrench’s view, this is a significant decision on the issue of holiday pay for two reasons. First, she thinks 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 the individual was actually a worker or an employee is now compounded by the risk of a legacy claim for holiday pay. It’s no defence that the employer honestly believed the individual was not legally a worker.’

Second, government enacted a two-year backstop on unlawful deduction of wages claims in 2014. This was, says Wrench, precisely because of concerns over the potential multi-billion-pound bills which employers might otherwise face in light of a claim for many years’ worth of outstanding holiday pay. She details: ‘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 legislation was not directly relevant to him. Further, the court stated that damages for working time regulation claims will not be limited to the two-year limit under the Deduction from Wages (Limitation) Regulations 2014.’ The result is that if the claim is brought under the working time regulations, and within three months of termination, the worker can claim back pay for the whole period of their employment.

The position now
So, where does the case leave us? The position is now quite clear. The court of appeal has 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.

In Wrench’s view, ‘this judgment confirms that if an employer cannot demonstrate that they’ve taken these steps, the right to paid leave doesn’t 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 untaken leave.’

In summary
Employment status is an area of law which is fraught with danger. Those in a position where employment rights are under the microscope ought to take good legal advice before they act or before a response is time barred.

Adam Bernstein is an independent columnist