UK: Employment Status – Unlimited Carry Forward of Holiday Pay
Mr Smith worked for Pimlico Plumbers Ltd (PP) for over five years. Throughout that time PP maintained that he was not an employee or a worker so was not entitled to paid holidays. He subsequently brought tribunal claims, including for unpaid holiday pay that had accrued over those years. His first battle was to establish that he was a worker, rather than an independent contractor, as workers are entitled to holiday pay. He won that battle in 2018 in the Supreme Court. His claim for holiday pay then proceeded back to the Employment Tribunal where he claimed that although he had been allowed to take, and had taken, holiday, he had not been paid for these.
Background to holiday pay claims
Under the UK Working Time Regulations 1998 (WTRegs), workers are entitled to 5.6 weeks’ paid annual leave consisting of four weeks leave required by the EU Working Time Directive (EU Leave), and an additional 1.6 weeks. The WTRegs provide that the 4 weeks’ annual leave required by the EU Working Time Directive (EU leave) may only be taken in the year in which it is due, but this rule is subject to exceptions permitting carry over as developed under European case law, and new provisions introduced in relation to the COVID-19 pandemic. The remaining 1.6 weeks entitlement under the WTRegs does not come from EU law, and can be carried forward if permitted by a “relevant agreement”.
Holiday pay claims are generally brought by workers under the annual leave provisions in the WTRegs and/or under the unlawful deduction of wages provisions in the Employment Rights Act 1996 (ERA). Each time a worker takes holiday but is unpaid or underpaid for that holiday, they are entitled to bring an unlawful deduction of wages claim, and where there is more than one deduction, they could bring a claim in respect of the series of deductions (each non-payment or underpayment being one unlawful deduction in a series).
The Tribunal and EAT decided that his claim for unlawful deductions under the ERA was out of time because it had to be brought within three months of the last period of holiday, and the claim for unpaid holiday pay did not carry over each year until termination of his engagement.
The Court of Appeal reversed those decisions, finding that Mr Smith was entitled to backdated holiday pay relating to the 4 weeks’ annual leave required by the EU Working Time Directive, for every year he was working for Pimlico Plumbers, from 25 August 2005 to 3 May 2011. Applying the principles set down by the ECJ in King v Sash Windows, the CA decided that workers who were denied the opportunity to take their EU leave can accumulate leave and carry it over to subsequent years, and are entitled to payment in lieu on termination. The worker will then have 3 months from termination to bring their claim. This applies whether or not the worker actually took leave (as in this case) or not (as was the case in King v Sash Windows).
The CA said that the right to carry over the EU leave will only be lost if the employer can show it gave the worker the opportunity to take paid annual leave, encouraged them to take it and informed them that the right would be lost at the end of the leave year.
Implications for employers
This case only concerns the right to the first four weeks’ of paid annual leave under the WTRegs and so does not concern the remaining 1.6 weeks’ paid leave entitlement under the WTRegs or any additional contractual leave.
Nevertheless, this case is significant for companies which engage self-employed consultants and contractors on a long term basis, such as in the gig economy. Where those individuals are able to establish that they are workers rather than independent contractors, they may bring claims for holiday pay and national minimum wage. The case establishes that where such individuals have been denied worker status whilst working for their employer, they can recover, without limit, on termination of their employment, compensation for four weeks’ EU Leave which they were entitled to for each year of their employment, whether or not they took that leave.
As regards the remaining 1.6 weeks’ paid leave entitlement under the WTRegs and any contractual leave, unless there is a relevant agreement or contractual provision permitting carry over, such holiday will be lost if not taken in the holiday year it is due.
The case has wider implications too.
For those employers who are facing claims for underpaid holiday pay, this case signals the end of the principle established in Bear Scotland that a gap of more than three months between deductions in a series effectively brought the series to an end. Since the EAT’s judgment in 2015, this argument has been used to limit backdated holiday pay claims where workers allege that their employers have underpaid holiday over long periods of time. The CA’s comments on this point did not formally overrule the EAT. So for now, employment tribunals are technically still bound by Bear Scotland as it is an EAT decision. However, since the EAT is not bound by a previous EAT rulings, it is open to any future EAT to reconsider Bear Scotland in light of the CA’s comments.
Effect of Brexit
The CA’s judgment involved the interpretation of EU case law and related to proceedings which began before 31 December 2020 (the end of the transition period). It is likely that the CA’s judgment in this case will continue to have effect in proceedings which begin after Brexit because the EU Withdrawal Act makes it clear that the UK courts still have to interpret the WTRegs so far as is possible to achieve the result required by the Working Time Directive.
Long term sickness
The case does not concern workers who could not take their paid annual leave because of long term sickness. Case law has established that a worker can carry forward their 20 days EU Leave where they are unable or unwilling to take it due to sickness. However, the latest case law regarding long term sickness indicates that employees on long term sick leave are only entitled to carry forward their EU Leave for 18 months from the end of the leave year in which that holiday was due. The question is whether the principles in King and Smith can now be applied to long term sickness cases as well. That seems unlikely since the ECJ in King made it quite clear that there is a distinction between long term sickness cases and cases where worker status has been denied,
In view of the financial significance of this case it seems likely that it will be appealed to the Supreme Court. This may at least give more definitive guidance on whether Bear Scotland is indeed dead in the water, or any further hints on whether indefinite carry forward also applies in wider cases of underpaid holiday pay or cases of long term sickness
Key Action Points for Human Resources and In-house Counsel
The best way to prevent any arguments around carry over of holiday is to follow the guidance of the CA by having a clear policy which makes it clear that workers have the opportunity to take paid leave, are encouraged to do so and understand that the right will be lost at the end of the leave year if not taken.