Why the case matters

Holiday pay issues can lay dormant for years and, as the Bear Scotland litigation demonstrated many years ago, can create a significant liability for backpay that employers do not see coming. The fickleness and complexity of the case law in the area doesn't help. With employers having thought that they could rely on the two-year backstop in order to limit historic claims for unlawful deductions, as well as the rule that more than a three month gap breaks a series of deductions, they now have new areas of discomfort. This is as a result of the Court of Appeal's decision in Pimlico Plumbers, which saw a worker win the right to receive holiday pay on termination of his engagement, for the whole six year duration of his contract. The claim is thought to be worth around £75,000.

We explore the findings of the case below. Notably, the usual ‘use it or lose it’ rule applied by many UK employers, which requires workers to take holiday by the end of the relevant holiday year, as permitted by the Working Time Regulations, did not apply in his case.

Facts

Mr Smith worked for Pimlico Plumbers for around six years and his engagement was categorised as self-employed. Throughout this time, he never took paid holiday as he was not considered eligible for it.

On termination, and following a period of serious illness, Mr Smith brought various claims for unfair dismissal, disability discrimination and holiday pay. The preliminary issue of status went all the way to the Supreme Court, with Mr Smith establishing worker status. In the instant case, his entitlement to holiday pay was under consideration. Initially, Mr Smith's claim for holiday pay failed in the employment tribunal and the Employment Appeal Tribunal (EAT), largely as a result of the way he was considered to have pleaded his case.

Decision

The Court of Appeal allowed the appeal and held that Mr Smith was able to claim for the entire arrears of holiday pay on termination of his engagement. The claim did not crystallize until termination, when a provision in the Working Time Regulations 1998 entitles a worker to a payment in lieu of untaken holiday.

Where the EU-derived right to paid holiday is denied to the worker (in this case because he was not recognised as a worker by the company), the usual 'use it or lose it' rule cannot be taken advantage of by the employer. Further, the three-month limitation period that usually applies to claims for unpaid holiday pay did not apply in this case as Mr Smith was not bringing his claim as a series of deductions.

He was able to take advantage of the provision which enables the worker to claim on termination for outstanding holiday. Although Mr Smith had taken time off on an unpaid basis, he had not enjoyed the right to paid holiday. Previous case law suggested that claims could only be made where no holiday was taken but this case emphasizes that the right to paid holiday is a composite right that cannot be broken down as if pay and leave are separate elements.

It is worth noting that this judgment concerns only the worker's entitlement to four weeks' paid annual leave under the Working Time Directive ("WTD"), not the additional 1.6 weeks' leave entitlement under the Working Time Regulations. The judgment also establishes that a worker will only lose their entitlement to four weeks' paid annual leave at the end of each year if the employer can specifically and transparently show that they:

• gave the worker the opportunity to take paid annual leave
• encouraged the worker to take paid annual leave
• informed the worker that the right would be lost at the end of the year.

If the employer cannot evidence this then the entitlement does not lapse at the end of the year, it carries over and accumulates until termination of the contract, at which point the worker is entitled to payment in respect of all untaken leave.

Why we should care

• If an individual is successful in challenging their self-employed status and they are classified as a worker, they will potentially be able to claim holiday back pay dating back to when they started work. This would apply to both untaken leave and any taken but unpaid leave.
• The risk is greatest for those in the gig economy. Although this judgment does not change how worker status is assessed, it makes the potential risk of misclassifying employees greater as the value of any unpaid holiday which that individual might be entitled to will potentially be higher.
• All employers should flag the 'use it or lose it' rule to employees and document the steps they have taken to allow and encourage employees to exercise holiday rights.