“Self-employed contractor” found to be a worker can claim for all unpaid holiday pay on termination

Four-week holiday entitlement carries over where right is denied, whether or not worker takes unpaid leave.

Our regular readers may remember the long-running case of Mr Smith, whose contract with Pimlico Plumbers described him as an independent contractor. After the termination of his contract, Mr Smith brought a number of claims requiring worker status. The Supreme Court determined in 2018 that Mr Smith was a worker and not a self-employed contractor. Our report on this judgment can be found in the June 2018 edition of our Employment Law Bulletin which is available on our website.

Following this decision, an employment tribunal decided Mr Smith’s claim for pay for holiday which he had accrued but not taken since August 2005 was out of time. This was on the basis that Mr Smith had not brought his holiday pay claim within 3 months of the last underpayment by the employer (the date on which he should have been paid for a period of leave taken).

Mr Smith argued that the principles of the European Court of Justice (ECJ) case of King v Sash Window Workshop (2018) should be applied. In that case, the ECJ held that a worker is entitled on termination to be paid for any accrued annual leave under the Working Time Directive, where the worker has been discouraged from taking holiday because it would have been unpaid. As Mr Smith brought his claim within 3 months of the termination of his contract, he argued that his claim was in time.

The tribunal did not agree and distinguished the case of Mr King. It noted that Mr King’s case concerned the right to carry over until termination annual leave that is not taken because an employer fails to remunerate annual leave. Mr Smith, on the other hand, had been able to take and had taken leave, although it was unpaid.

The EAT agreed.

Case details: Smith v Pimlico Plumbers

Workers denied the right to paid leave are entitled to bring a claim on termination whether unpaid leave has been taken or not

The Court of Appeal has now allowed Mr Smith’s appeal, enabling him to claim for holiday pay stretching back to 2005. Lady Justice Simler made clear that European Union law establishes a “single composite right” to 4 weeks’ paid annual leave. A worker who takes unpaid leave when the employer refuses pay for such leave is not exercising the right to paid leave.

The judgment notes that under the Working Time Regulations 1998 (WTR) workers lose the right to statutory leave which is untaken at the end of the leave year. However, it makes clear that the worker will only lose the right if they have actually had the opportunity to take paid leave.

An employer would have to show 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 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.”

Lady Justice Simler held that Mr Smith’s claim was in time because he was denied the opportunity to exercise the right to paid leave throughout his engagement. Pimlico Plumbers had not shown that it had given Mr Smith the opportunity to take paid leave and encouraged him to do so. The right therefore carried over and accumulated until termination of the contract, at which point Mr Smith was entitled to a payment in respect of the unpaid leave.

As an appendix to the judgment, the Court of Appeal has suggested that the following words are read into Regulation 13 of the WTR:

"Where in any leave year an employer (i) fails to recognise a worker's right to paid annual leave and (ii) cannot show that it provides a facility for the taking of such leave, the worker shall be entitled to carry forward any leave which is taken but unpaid, and/or which is not taken, into subsequent leave years."

Implications for employers

The key significance of this decision is for organisations engaging with individuals who are expressed to be self-employed contractors or consultants, but who may be found to be workers at a later date, and who have been denied the right to paid annual leave. (See our article from February 2021 for further detail on worker status:  Supreme Court confirms that Uber drivers are workers after denying appeal which is available from our website.)  Where arrangements with these individuals are long-standing, employers could find that they are facing claims for very significant amounts. It is reported that Mr Smith’s claim for historic holiday pay is in the region of £70,000.

Claims for holiday pay are most commonly brought in the employment tribunal as claims for unlawful deduction from wages. Such claims must be brought within 3 months of the deduction (the date of the incorrect payment), or the last in a series of deductions. The Deduction from Wages (Limitation) Regulations 2014 set a 2-year limit on the arrears which can be claimed due to a series of deductions. This considerably reduces the risk to employers facing claims for holiday pay where there is a series of deductions.

However, it is important to note that the decision in Mr Smith’s case means that workers who have been denied the right to paid leave can bring a claim for all of their unpaid holiday pay on termination, whether or not they have actually taken unpaid leave. This will not be a claim in relation to a series of deductions, but one single deduction crystallising on termination.   

This case only applies where the claimant has been denied the right to paid leave altogether. It will not apply where the claimant has received holiday pay but been underpaid for it. It also applies only to the 4-week “Euro leave” under the Working Time Directive and Regulation 13 WTR. It does not apply to the additional 1.6 weeks’ paid leave under Regulation 13A WTR. 

It is possible that this judgment will be appealed.

The exit of the UK from the European Union does not impact on this decision, as the fundamental rights or principles of the European Union law underpinning the right to 4 weeks’ paid leave are retained in UK law. That is not to say that the Government might not bring forward legislation impacting on these rights in future.