No right to carry over holiday pay entitlement where leave has already been taken unpaid

Background

In 2017, in King v The Sash Window Workshop Ltd, the European Court of Justice (ECJ) ruled that where a worker is not granted the paid holiday to which they are entitled under the EU Working Time Directive, they can carry over that right indefinitely until they have the opportunity to exercise it. When their employment terminates, the employer must pay them in lieu of the holiday that they did not take.

The implications of this judgment were potentially far-reaching. The ECJ said it was no defence that the employer, Sash Windows Workshop, did not realise that Mr King was a “worker” in law. This effectively charged employers with ensuring they have made a correct assessment as to an individual’s status. Take the situation where individuals are treated as fully self-employed independent contractors, and so not afforded a right to paid holiday at all. If they are later found to have been workers, King provides scope for them to pursue a claim for multiple years of unpaid holiday, potentially encompassing their full period of engagement.

It should be noted that, as an ECJ decision, King arguably only applies to the four weeks’ leave granted under the Working Time Directive, and not the additional 1.6 weeks provided by the UK Working Time Regulations (or any contractual entitlements). Nonetheless, the sums to which a worker could be entitled to under the ECJ’s ruling are potentially substantial where an individual has been engaged for several years. 

Facts of the case

The new ruling by the Employment Appeal Tribunal (EAT) in Smith v Pimlico Plumbers Ltd means that the impact of King will, at least in some cases, be limited. Mr Smith worked for Pimlico Plumbers as a plumbing and heating engineer and was treated as a self-employed contractor. While he was able to take holiday (for instance at Christmas, during the summer and on bank holidays), he had never been remunerated for such leave. The final period of unpaid holiday that Mr Smith believed he was entitled to payment for was in February 2011. He left Pimlico Plumbers on 5 May 2011.

On 1 August 2011, Mr Smith brought a claim in the Employment Tribunal (ET) asserting that he had in fact been an employee of Pimlico Plumbers. He claimed, among other things, that he was entitled to payment for unpaid holiday taken throughout his time working for the company (totalling £74,000). The issue of Mr Smith’s employment status ultimately went to the Supreme Court in 2018, where a landmark judgment decided that he was a worker.

As a worker, Mr Smith was entitled to holiday pay. The issue of whether he was entitled to a backdated payment for his unpaid holiday was sent back to the ET for its determination.

Employment Tribunal’s decision

As the most recent period of holiday pay that Mr Smith was claiming was from February 2011, and he had submitted his claims in August 2011, he appeared to be outside the three-month time limit for bringing a claim. The ET had to decide whether the principles set out by the ECJ in King meant that Mr Smith could carry over the right to claim payment for unpaid leave from year to year, so it became payable on his termination in May 2011. That would mean his claims in August 2011 were “in time”. 

The ET found that the principles in King did not apply where the worker had taken the holiday but not been paid for it. Rather, they applied only where they had not taken holiday because they would not be paid for it. Mr Smith appealed to the EAT.

Employment Appeal Tribunal’s decision

The EAT agreed with the ET and dismissed Mr Smith’s appeal, ruling that the ECJ’s decision in King only applied to holiday that had not already been taken.

The ECJ had observed in King that the purpose of the right to annual leave was to allow workers to take adequate holiday to enable them to rest, and that uncertainty over whether holiday would be remunerated might dissuade workers from taking it. The EAT, however, distinguished the position in Mr Smith’s case from that situation. While the EAT acknowledged that the uncertainty brought about by a lack of remuneration could jeopardise a worker’s ability to rest, it did not consider that the ECJ had meant that the worker should be reimbursed for leave that they had actually taken, and self-evidently had not been deterred from taking.

Accordingly, the EAT concluded that the most recent deductions Mr Smith could claim for were in February, not when his employment terminated in May. His claims were therefore out of time and the ET did not have jurisdiction to hear them.

The EAT went on to note that, even if Mr Smith’s claims for the deductions in February 2011 had been in time, his claims for earlier deductions throughout the rest of his time at Pimlico Plumbers would not have been. A previous EAT decision (in 2014), had established that, where there is a gap of three months or more between deductions, they cannot be held to form a continuing “series of deductions” in relation to which a worker can bring a claim (Bear Scotland Ltd v Fulton). As the next most recent deductions were more than three months before the deductions in February 2011, Mr Smith could not claim for them.

Mr Smith had argued that a later Northern Ireland Court of Appeal decision (Chief Constable of Northern Ireland v Agnew) was inconsistent with Bear Scotland and should be followed. The EAT could not, however, be persuaded to depart from its own precedent in Bear Scotland.

Implications for employers

This case provides welcome clarity for employers, following the uncertainty created by King, on the holiday payments for which a worker is entitled to claim. The EAT’s judgment will be particularly useful for businesses engaging consultants or contractors and operating in the platform economy, where the prospect of a substantial payment for unpaid holiday could previously have incentivised individuals working on a self-employed basis to challenge their employment status.

Nonetheless, where someone who is a worker has taken holiday and not been paid for some or all of it, this would amount to an unlawful deduction from wages if they submit a claim in time. The government acted in 2014 to taper the financial impacts of such claims significantly, by implementing a two-year backstop – that is, workers can only retrospectively claim for deductions in the preceding two years. And there remains the prospect that someone who, unlike Mr Smith, has been denied any right to leave (paid or unpaid) could have a much more substantial claim. 

Smith v Pimlico Plumbers Ltd – judgment available here