The ‘correct’ approach to holiday pay claims – what do employers need to be aware of?

Employers need to be aware that workers can carry over annual leave, whether it has been taken or not taken by the worker, and where it has not been paid, even where the employer did not recognise that they were a worker. At least that is what the Court of Appeal have said in the latest case in the ongoing holiday pay dispute between Mr Smith and Pimlico Plumbers (Smith v Pimlico Plumbers). During his six year engagment with Pimlico, Mr Smith was never given any right to paid holidays. The Court of Appeal’s judgment clarifies that Mr Smith could claim compensation for all the unpaid leave he took throughout his engagement. Workers’ entitlement to recover pay for unpaid leave can be claimed years later, with workers’ claims possibly going back over two years and to the start of their enagagement.

The Court of Appeal’s judgment has wide-reaching implications for workers and employers regarding holiday pay and clarifies the ‘proper’ approach employers should take (at least for now, as at the time of writing we do not know whether Pimlico will appeal the Court of Appeal’s decision) in relation to its employees, workers and those who are self-employed but may otherwise be considered workers in law. Employers may need to give further thought to anyone who may fall within the latter category of self-employed individuals who may in fact be workers and have more rights than the employer realises.

The key points for employers to take heed of are as follows:

  1. Employment ‘status’ is key to determining whether an individual has a claim for holiday pay – only employees and ‘workers’ enjoy the right to paid holiday. Employers should be cautious if/when proceeding on the basis that someone is not entitled to paid holiday on the premise that they believe the individual in question is ‘self-employed’ rather than an employee or a worker. This is no defence and the Court could go on to reach a different finding regarding the individual’s employment status. In Smith v Pimlico Plumbers, for instance, the Court found that Mr Smith was a ‘worker’ for Pimlico, rather than ‘self-employed’ – despite Mr Smith being treated by Pimlico as a self-employed independent contractor. The courts and tribunals will generally look towards the true substance of the arrangement, including what happens day to day, who has control, and other tests.  They will look beyond an ‘employment status’ type clause in any contract between the employer and individual, to determine a person’s employment status. If in doubt, our expert employment team are on hand to  advise on any employment status related queries.
  2. Workers’ right to paid annual leave is a single right – rather than two separate rights, being one right to annual leave and a separate right to be paid for that leave, as the drafting of the law had otherwise suggested.
  3. Workers can carry over unpaid leave throughout their whole engagement, without limit, whether it is taken or untaken, and claim pay/compensation for it years later – where an employer does not pay holiday pay, it does not matter if the worker has actually taken the ‘leave’ or not for them to be entitled to be paid for it. Workers have the right to ‘carry over’ any accrued/unpaid holiday (at least 4 weeks’ holiday per year) from the start of their engagement, and have it paid by the employer on termination of the engagement. The financial cost to employers is potentially very high.
  4. A worker can only lose the right to claim holiday pay on termination from earlier years (i.e. to carry over) if an employer can show that (1) it specifically and transparently gave the worker the right and opportunity to take paid holiday, (2) encouraged them to take it, and (3) informed them that it would be lost at the end of the leave year if they did not do so – if an employer cannot show all three, the right to paid holiday does not stop at the end of that ‘leave’ year and carries over each year until the end of the engagement without limit (where the employer must then pay the ‘worker’ for any accrued holiday pay in that ‘leave’ year as well as any accrued pay which has been carried over). It is key for employers to ensure that they are taking an active approach to managing employees’/workers’ holiday entitlement in the workplace, and doing all they can to follow the above steps. Otherwise, employers face the risk of a hefty bill for holiday pay at the end of a worker’s engagement – potentially for holiday going back to the start of that worker’s engagement which could be many years.For specific and tailored advice on how to manage holiday pay across your workforce and/or for exemplar wording to send to your workforce to deal with any of the three elements listed above, do not hesitate to contact our team.
  5. An employer’s liability to pay holiday pay to employees and workers may not be ‘broken’ if there has been a gap of more than three months between a series of unlawful deductions – whilst this is not binding, the Court of Appeal called into question the long-standing position, that where there has been a series of underpayments/non-payment of holiday pay , a claim for unpaid holiday pay has been brought by the worker as an ‘unlawful deductions from wages’ claim, and there is a gap of more than three months between said underpayments , an employer is not liable to pay unpaid holiday pay which accrued before the three months. The Court of Appeal did not decide this point, but did say in its ‘strong provisional view’ that a later case, which held that a series of deductions was not broken by a three month gap and/or by the employer paying a proper amount of holiday pay in between the series of underpayments, was correct. In other words, workers can potentially claim for holiday pay from the start of their engagement, even if there are gaps of more than three months in between the unpaid leave and/or the employer has paid them the proper holiday pay at certain points.

We refer to 4 weeks’ annual leave above (rather than 5.6 weeks’ leave, which all employees and workers are entitled to take in the United Kingdom) as the claims brought in Sash v Pimlico Plumbers and the other cases referred to above, only deal with 4 weeks’ leave and the Employment Tribunal did not reach a finding in respect of the additional 1.6 weeks’ leave. For example, a worker who has not been paid their holiday for 12 years, can claim 12 x 4 = 48 weeks’ pay (plus interest, potentially).

To be clear, workers’ claims for holiday pay for the full 5.6 weeks’ annual leave is limited to that which has accrued for up to two years before the claim.

In light of the Court of Appeal’s Judgment and the above clarifications, employers need to ensure they understand any duties in respect of holiday pay, employees/workers are encouraged to exercise their right to take paid holiday, and that holiday is paid for all workers, who have the right to receive holiday pay. Workers should also be aware of their rights to paid leave.

Contact our employment team for specific advice on how to navigate any holiday pay related queries or workplace processes, to ensure your approach is ‘correct’.

All information is true as at the date of preparing this article. Please always consult the latest legislation or government guidance for accurate information.