Significant Holiday Pay Case Has Far Reaching Consequences for Employers
A significant holiday pay decision was handed down by the Court of Appeal this week, in the case of Smith v Pimlico Plumbers Ltd.
The decision means that workers who have taken holiday but not been paid for it will be able to carry over the right to payment from one leave year to the next.
The decision has potentially far reaching consequences for organisations who have failed to pay holiday pay to workers for any reason; as well as for organisations who might be quantifying back pay to correct any holiday pay underpayment.
Dispute Over Employment Status
Mr Smith worked for Pimlico Plumbers Limited (PP) from 25 August 2005 until May 2011. Whilst working for PP, Mr Smith was permitted to take holiday but he was not paid for it, as PP said he was not a worker so was not entitled to paid annual leave.
Mr Smith was held to be a worker in the Supreme Court decision of Pimlico Plumbers Limited and another v Smith [2018]. This meant his holiday pay claim could proceed.
The Right to Statutory Holiday Under UK Law
Employees and workers in the UK are entitled to a minimum of 5.6 weeks (or 28 days) annual leave per year inclusive of bank holidays. The right to this statutory holiday is set out at Regulation 13 of the Working Time Regulations 1998 (WTR). The WTR provide for:
- four weeks' annual leave under Regulation 13 (this Regulation incorporates the European statutory minimum holiday entitlement into domestic law), and
- a further 1.6 weeks' additional holiday under Regulation 13A, which is a domestic entitlement to additional annual leave going over and above the European entitlement
Regulation 14 of the WTR sets out the right to be paid in lieu of accrued but untaken holiday on the termination of employment.
The Litigation So Far
Both the Employment Tribunal (ET) and the Employment Appeal Tribunal (EAT) rejected Mr Smith's holiday pay claim. In summary, the ET found Mr Smith's claim was out of time, having not been brought within three months of the most recent incorrect payment. The ET also found that Mr Smith was not entitled to rely on the King principle in order accrue the right to payment for unpaid leave over the entire course of his employment so that it would become payable in full on termination. ET held that the King decision could be distinguished because it dealt with the scenario where no annual leave was taken at all, rather than Mr Smith's situation where he effectively took unpaid leave. The EAT upheld the ET's decision and Mr Smith appealed to the Court of Appeal.
The Right to Paid Annual Leave Can Accumulate
The Court of Appeal allowed Mr Smith's appeal. It held the right to paid annual leave is a singular right, that is, PP needed to show it had allowed Mr Smith both the opportunity to take leave and pay. As PP had not done so, Mr Smith's claims for unpaid leave accumulated and fell due for payment on the termination of his employment. This also meant Mr Smith's claim was not out of time.
The Court of Appeal Casts Doubt on the Bear Scotland 'Series of Deductions' Rule
The Court of Appeal also commented in its decision, on the controversial 'series of deductions' rule affirmed by the Employment Appeal Tribunal in the Bear Scotland case. The rule says you can only go back three months from the last incorrect payment when seeking to recover underpaid holiday by way of an unlawful deductions claim, and that a larger gap between payments breaks the 'series.'
The Court of Appeal was not technically required to comment on this rule as part of Mr Smith's appeal. It nevertheless expressed a "strong provisional" view that a three month gap between deductions or incorrect payments will not automatically break a series of deductions. Instead, the Court of Appeal has said the question of whether there has been a series of deductions sufficiently linked to recover the whole suite of underpayments at Tribunal will be a question of "fact and degree".
Far Reaching Impact
As a result of this case, workers who are denied the right to take paid annual leave (perhaps due to a dispute over their employment status) will accrue the right to that leave over the whole course of their employment and until they take the leave. If the worker is not given the opportunity to take the paid leave before their employment terminates, they will be entitled to pay in lieu of the entire amount of accrued leave on termination. In Mr Smith's case, this amounted to £74,000.
The Court of Appeal's comments on the 'series of deductions' rule also raise uncertainty about whether and how the rule might be followed in future litigation on the same point.
The case serves as a further demonstration of the importance of clearly defining the employment status of staff, including ensuring that written contracts reflect the reality of the working relationship in practice, and that at least statutory minimum holiday and pay entitlements are applied.