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Employment, Pensions & Immigration
In a significant judgment for employers in the gig economy and beyond, the Court of Appeal has ruled that a worker is entitled to carry over four weeks per year of EU leave which has been taken but not paid because his employer didn’t recognise that he was a worker.
Mr Smith’s battle for backdated holiday pay against his former employer Pimlico Plumbers reached the national headlines in 2018 when the Supreme Court found he was a worker and not an independent contractor, as his employer had claimed. As a worker, he was able to continue with his holiday pay claim in the tribunal. But he was subsequently unsuccessful before the tribunal and on appeal to the Employment Appeal Tribunal as his claim was presented out of time. The Court of Appeal in Smith v Pimlico Plumbers has now 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.
Under the 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 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).
As for time limits, a claim for unlawful deductions under the ERA must be made within 3 months of the unlawful deduction or from the last deduction in a “series” of deductions. A claim under reg. 30 WTRegs must be brought within 3 months of the date on which it is alleged that the exercise of the right should have been permitted, or the relevant payment should have been made. King v Sash Window (ECJ) established that in certain circumstances the right to paid annual leave could be carried over so a reg. 30 claim at the end of employment was not time barred if made within 3 months of termination.
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. He claimed that although he had been allowed to take, and had taken, holiday, he had not been paid for these. 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.
Reversing the decisions of the Employment Tribunal and the Employment Appeals Tribunal (EAT), the Court of Appeal (CA) decided that Mr Smith’s unpaid holiday carried over each year until termination. The claim under the WTRegs was in time because it was brought within 3 months of termination. There are 3 key points which arise from the CA’s judgment:
King v Sash Window (ECJ) also concerned a claim for backdated holiday pay, except, unlike in Smith, the individual concerned didn’t take any holidays because he thought he wouldn’t be paid. King decided that workers who were denied the opportunity to take holiday can accumulate leave and carry it over to subsequent years, and are entitled to payment in lieu on termination.
The CA said that this principle should also apply in Mr Smith’s case, where the worker actually took the leave but wasn’t paid for it. The reason for this was that there is a right to be paid when the leave is taken which should not be subject to any pre-conditions such as whether they took the leave or not. The purpose of paid annual leave is to ensure to ensure rest and relaxation, without worry and uncertainty that it won’t be paid. Any practice of an employer which deters the worker from taking his leave was incompatible with that purpose.
Mr Smith could carry forward his four weeks’ EU leave if he was denied the opportunity to exercise his right to take paid EU leave. 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. If they can’t do that, the right carries over and accumulates until termination, at which point the worker will be entitled to payment in lieu of untaken leave. The worker will then have 3 months from termination to bring their claim.
Importantly, the Court of Appeal gave a “strong provisional view” on the principle set down by the EAT in Bear Scotland  which decided that a gap of more than three months between deductions prevented the deductions from forming part of a “series” of deductions under the ERA (see Background above). The CA cast considerable down on this principle saying that there was nothing to suggest that the three-month time limit for bringing claims under the ERA was intended to restrict or qualify the meaning of a ‘series of deductions’. It is a question of fact and degree, based on the evidence, whether the deductions are sufficiently similar or related over time to constitute a “series”. It was necessary to find a factual and temporal link between deductions rather than impose a particular three month limit on the gaps between particular deductions. The CA observed that the Northern Ireland Court of Appeal was correct when it declined to follow Bear Scotland in 2019 (see Chief Constable of the Police Service of Northern Ireland and anor v Agnew and ors).
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.
But are there any wider implications of this case?
Claims for underpaid holiday pay
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 on this point because Mr Smith’s deduction from wages claim failed as it was out of time. 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 previous EAT rulings, it is open to any future EAT to reconsider Bear Scotland in light of the CA’s comments.
The Deduction from Wages (Limitation) Regulations 2014 further restricts backdated claims by introducing a two year long stop on the period of recovery in cases based on a series of deductions for claims. Because Mr Smith’s claim was brought before 1 July 2015, the CA did not have to deal with the implications of the Regulations so it is unclear whether a future court might declare them incompatible with EU law following Smith. Nevertheless, these Regulations were introduced to limit the effect of the deduction from wages claims which arose in relation to Williams v British Airways and Lock v British Gas which ruled that holiday pay should be calculated on the basis of normal remuneration, so included commission and overtime. As such, for most employers, the Regulations may have outlived their usefulness as employers have adjusted the way they calculate holiday pay.
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 unless the employer has disputed the right to take leave and refused to remunerate the worker for the leave, or where the worker’s contract does not recognise the right to paid leave.
Nevertheless, 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.
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.