An individual’s employment status is important because it governs the legal rights for which they qualify. If someone is incorrectly categorised as an independent contractor, they may bring a claim for rights that they are entitled to as an employee or a worker – including for paid annual holiday. The vexed question of how much compensation a worker is entitled to in this situation has been considered in a number of recent cases.

In 2018, the Supreme Court decided that the self-employed plumber Mr Smith should have been classed as a worker by Pimlico Plumbers. The case then returned to the Employment Tribunal (ET) to decide on compensation, including how much he was owed for unpaid holiday.

In King v The Sash Window Workshop Ltd, the European Court of Justice (ECJ) ruled that where a worker is not granted the holiday to which they are entitled under the EU Working Time Directive (WTD), they can carry over that right indefinitely and must be paid in lieu of all untaken holiday when their engagement ends. Both the ET and the Employment Appeal Tribunal (EAT) had decided that the principle in King only applied if the worker had not taken the holiday at all. In this case, Mr Smith had taken holiday but not been paid, so any claim had to be brought within three months of the last period of holiday, and the claim for unpaid holiday pay did not simply carry over until the end of his engagement. This decision was appealed to the Court of Appeal (CA).

Full compensation is payable

The CA disagreed with the earlier decisions, and ruled that Mr Smith was able to claim compensation for all of the unpaid leave that he took throughout his engagement. This applies for up to four weeks per year, which is the WTD basic “Euro-leave” amount of holiday.

The CA reached this decision because it took the view that the ECJ’s decision in King applied equally to taken but unpaid leave. This meant that each year that Mr Smith took holiday but was not paid for it, four weeks carried forward from that year until the end of his engagement. Mr Smith worked from 2005 until 2011, so this could be a significant sum of money when it finally comes to be calculated by the ET.

The basic reasoning is that there is a single right to paid annual leave under the WTD which should not be subject to any preconditions. The right to paid leave is a health and safety measure, and so workers must be able to have genuine rest and relaxation when they are on holiday. A worker who does not know whether they will be paid for the time off is not able to benefit fully from the leave.

This ruling is particularly significant because it effectively avoids the two-year limit on deduction from wages claims from workers in Mr Smith’s situation. If a worker takes holiday but is not paid for it, this is a deduction from wages. The EAT said that this was an individual deduction each time it happened. This meant any claim had to be brought within three months of the last deduction, and a claim for a series of deductions could only go back for two years. The CA’s decision changes this position completely, because the unpaid holiday all carries over until the end of the engagement. The worker only needs to bring their claim within three months of the end of the engagement, and can then claim for the full amount of carried-over “Euro-leave” holiday, even if this covers many years.

The CA also took the opportunity to comment on some other case law about deductions from wages. In Bear Scotland v Fulton, the EAT said that a gap of more than three months between failures to pay holiday pay would “break” a series of deductions. This means that workers and employees cannot bring a claim for a series of unpaid holidays if there are more than three months between each period of unpaid leave. The Northern Ireland Court of Appeal has already disagreed with this approach in another case. The CA in this case gave a “strong provisional view” that Bear Scotland was wrong, although it did not overrule the EAT on this point because Mr Smith had failed to bring any deduction from wages claim in time.

Implications

It is important to note that this decision only applies to the four weeks of “Euro-leave” under the WTD, not the additional 1.6 weeks of leave under the UK’s Working Time Regulations. Nevertheless, it will be of concern to many businesses who have engaged individuals on an independent contractor basis in circumstances where there is doubt as to their classification – relevant to businesses in the gig economy and beyond. They may well have allowed these individuals to take time off as holiday, but not paid them for that time. If it turns out that these individuals had been misclassified and were actually workers or employees the business may now find itself facing group holiday pay claims stretching back for years.

The limit of two years of back pay for deduction from wages claims was originally brought in to assist employers when the ECJ ruled in Williams v British Airways and Lock v British Gas that holiday pay should be calculated on the basis of “normal remuneration” rather than basic pay only, so potentially including payments such as overtime and commission. Employers have now had the opportunity to change their holiday pay calculations to comply with the law, so it may well have outlived its usefulness for that purpose in any event. The two-year limit is also still in place for standard deduction from wages claims, such as where an unscrupulous “employer” has simply failed to pay a worker properly over a long period of time, which is perhaps unfortunate as this was not the real purpose behind the limit being introduced.

Although the decision is based on EU law, it relates to annual leave (which is an essential principle of EU social law), and these proceedings were commenced before the completion of the Brexit deal on 31 December 2020. This means that the UK courts in this case must still follow the EU law on paid annual leave as it was before Brexit. For future similar claims, both the Supreme Court and the CA will have the power to depart from pre-Brexit EU case law if it seems “right to do so” - meaning it is possible that the higher courts could decide to depart from King and take a different approach to unpaid holiday. This currently seems very unlikely, however, given the strength of the CA’s view in the case that failing to pay for annual leave prevents proper rest and relaxation and so undermines its underlying health and safety purpose.

For businesses who are concerned about the wider implications of this decision for holiday pay rules, the CA provided some clear guidance on when a rule preventing carry-over of holiday to the next leave year will be valid. The business must be able to show that the worker was given the opportunity to take paid leave, was encouraged to do so, and was informed that the right would be lost at the end of the leave year. This decision certainly doesn’t change the ability to have strict carry-over rules, but it is important that these are set out in a clear policy and that workers have a genuine opportunity to take their leave during the year if they wish to do so.

Given the importance and potential business costs of this decision, it seems inevitable that it will be appealed. This may also provide the opportunity for a definitive ruling on the Bear Scotland issue of whether a break of more than three months between deductions from wages breaks the series. It is likely that the Supreme Court will be meeting the parties for a second time in the near future.

Smith v Pimlico Plumbers Limited – judgment available here.