Employers’ exposure to holiday pay liability increases

In Smith v Pimlico Plumbers, the Court of Appeal (CoA) has decided that a worker who was denied the right to take any paid leave could be compensated for all the unpaid leave he took throughout his employment.

Mr Smith had previously succeeded in his claim for worker status against Pimlico Plumbers. As Pimlico had never recognised him as a worker and not given him the right to paid annual leave; he subsequently claimed compensation for all paid annual leave he should have had during his six year employment.

In a previous case, King v Sash Window, the European Court of Justice (ECJ) decided an individual who was not categorised as a worker and denied the right to take any leave was entitled to carry over and accumulate the four weeks’ annual leave a worker is entitled under EU law.

The CoA applied these principles to Mr Smith’s situation where he was permitted to take leave but unpaid because he wasn’t recognised as a worker. Mr Smith was therefore entitled to carry over and accumulate up to four weeks of any leave he took which went unpaid in each leave year, until the termination of his employment. When his employment terminated, he was due a payment in lieu of all the carried over, unpaid leave based on his normal remuneration.

The impact of the decision is wide-reaching. Employers that have incorrectly categorised their workforce or denied the right to take paid leave are exposed to compensation claims of up to four weeks’ normal remuneration for each year the worker was employed, whether or not they took the leave.

The CoA also cast significant doubt on a previous decision which limited how far back claims for incorrectly calculated holiday pay could go. Whilst Mr Smith’s claim was brought as a breach of the Working Time Regulations 1998, which sets out the right to paid annual leave in the UK, claims for underpaid holiday pay are usually brought as unlawful deduction from wages claims. These claims must be brought within three months of the deduction, unless there was a series of deductions, in which case the three-month time limit commenced on the last of the series of deductions. It was previously decided that if there was a gap of three or more months between the holiday pay underpayments, that would break the series of deductions and limit how far back the claim could go. The CoA considered that assessment was flawed casting doubt on whether employers will be able to rely on this to mitigate holiday pay liabilities where there has been a continuing underpayment of holiday pay.

Impact

As a consequence, employers must ensure they have categorised their workforce correctly and be able to show they have:

• specifically and transparently given 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 leave year, and;
• correctly calculated their holiday pay.

If you would like any help with your holiday pay processes or calculations, please contact Charlie Barnes.