UK: employers who wrongly deny worker status face historic claims for annual leave taken without pay

Employers who have potentially mis-categorised staff as self-employed may face significantly larger historic holiday pay claims following the Court of Appeal's recent ruling in Smith v Pimlico Plumbers (subject to any further appeal).  This will be particularly relevant to gig economy employers with a stable and long-serving workforce. The Court held that a worker can carry over and accumulate their 4 week EU-derived statutory leave entitlement ('Euro-leave') if the employer has denied them the opportunity to take the entitlement with pay, regardless of whether or not they have taken (unpaid) leave.  The right to pay in lieu of the entire accrued entitlement will crystallise on termination.

Obiter comments from the Court could also presage higher deductions claims for underpayment of statutory holiday against employers more generally (for example where it is alleged that the rate of holiday pay has been miscalculated due to exclusion of overtime pay).

It will be prudent for employers at risk of such claims to update their assessment of potential liability and make appropriate provision;  it will also be important for purchasers to consider this potential liability in the context of business acquisitions.

.....

The UK Working Time Regulations expressly do not permit carryover of the 4 weeks’ Euro-leave. Case law has established that, to comply with EU law, the UK regulations should be purposively construed to permit carryover where a worker has been prevented from taking his entitlement due to sickness absence or family-related leave. However, this can be subject to a time limit on when the carried over holiday can be taken, and a limit of 18 months after the end of the holiday year in which it accrued is lawful. In King v Sash Windows, the European Court of Justice (ECJ) held that workers should also be allowed to carry over untaken statutory holiday indefinitely where the worker did not take their entitlement because the employer wrongly refused to pay for it.  The ECJ ruled that a refusal to provide paid holiday amounted to ‘preventing’ the employee from taking their leave entitlement, as it would deter a worker regardless of his financial situation. Significantly, it was not appropriate to limit the period of carry over as, unlike long-term sickness cases, the employer had not suffered any organisational difficulties due to absence but on the contrary had benefited from the individual’s continuous work.

The issue in Smith v Pimlico Plumbers was whether the Sash Windows reasoning should also apply where the employer's refusal to recognise a worker's right to statutory holiday did not in fact discourage them from taking leave, unpaid.  The Employment Appeal Tribunal concluded that, although the lack of pay might well deprive a worker from fully benefiting from the rest and relaxation of holiday taken, the ECJ’s judgment could not be read as extending to this situation (though it found the ECJ’s decision difficult to interpret).  The only avenue for claims was therefore to claim pay for each period of leave taken, which meant that restrictive time limits for bringing the claims applied and therefore they were out of time.

The Court of Appeal has now disagreed: in its view, the right to annual leave and to payment during that leave are two aspects of a single right.  Where an employer refuses to pay for leave, the worker who takes unpaid leave is not exercising that statutory right, in the same way as the worker who does not take leave at all.  A worker can only lose the right to take Euro-leave at the end of a leave year when the employer can meet the burden of showing that it 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 right would be lost at the end of the leave year.

The ruling significantly increases an employer’s potential liabilities if workers treated as self-employed succeed in establishing worker status. Euro-leave entitlement accrued over the entire period of their engagement will be carried over (regardless of whether the worker actually took unpaid leave) and be capable of being taken while the worker remains engaged (if the employer accepts that the individual is a worker) or crystallise into an entitlement to payment in lieu on termination.  Claims for the latter can be brought within 3 months of termination.

The Court also gave its "strong, provisional view" (obiter) on the time limits that would have applied were the claims instead to be treated as for underpayment for leave taken.  Such claims must be brought within 3 months from the relevant deduction (ie, underpayment), or from the last in a series of deductions.  The EAT in Bear Scotland v Fulton ruled that a gap of more than 3 months between deductions breaks the series, thereby limiting the scope for many historic holiday pay claims.  The Northern Irish Court of Appeal in Agnew ruled that Bear Scotland is wrong on this issue, but this is not binding in Great Britain.  The Court of Appeal in Pimlico Plumbers has now made clear that it agrees with the Northern Irish Court's view; it therefore seems likely that the EAT's approach will be overruled in due course.  This will be relevant for all types of deductions claims, but will be particularly significant for employers facing claims for underpayment of holiday pay (where, for example, holiday pay has not been calculated in accordance with the rules on inclusion of overtime pay). Domestic rules limit deductions claims for underpayment of holiday to two years’ back pay but only in respect of claims issued on or after 1 July 2015, and there has been speculation that this rule too could be challenged (notwithstanding Brexit), on the basis that it breaches EU principles requiring an equivalent and effective remedy for breaches of EU rights.

Update: in its judgment of 4 October 2023 the Supreme Court agreed with the North Irish Court of Appeal in Agnew.