The Court of Appeal decision in the long-running and high-profile case of Smith v Pimlico Plumbers, has overturned previous decisions to extend the scope of the principle established in King v Sash Windows to any taken but unpaid 'Euro leave'. We take a look at this latest decision, what it means for employers and who could now have the opportunity to make a claim for unpaid or underpaid holiday pay.

The right to paid holiday in the UK

Workers and employees in the UK are entitled to 5.6 weeks paid holiday under the Working Time Regulations 1998 (WTR). This is made up of 4 weeks' holiday under the European Working Time Directive (known as 'Euro leave') and an additional 1.6 weeks' holiday under domestic law. This case deals only with 'Euro leave'.

A claim for holiday pay can be brought as an unlawful deduction from wages claim via section 23 of the Employment Rights Act 1996 (ERA), for unpaid holiday pay under regulation 30(1)(b) of the WTR, or as a separate claim for payment in lieu of unpaid holiday on termination of a contract under Regulation 14 of the WTR.

Employment status – was Mr. Smith a worker?

On the termination of his contract with Pimlico Plumbers (Pimlico), Mr. Smith brought various employment tribunal claims, including for unpaid holidays. His claims were brought within three months of the termination date but more than three months after the date of the last period of unpaid holiday.

Pimlico had maintained that Mr. Smith was an independent contractor and was not entitled to paid holiday.

In a decision issued in 2018 the Supreme Court concluded that he was a worker, meaning that he was entitled, in principle, to 5.6 weeks' paid holiday and able to take his claims to the tribunal.

Mr. Smith's claim for holiday pay

Mr. Smith had taken holidays, but they had been unpaid. His original claim to the tribunal set out a claim for pay for holiday taken under the WTR and unlawful deduction from wages under ERA. Pimlico argued that he was time barred from making these claims because more than three months had passed between the last period of unpaid holiday he had taken and the submission of his claim – the time limit for making these claims.

However, Mr. Smith also tried to rely on the ECJ case of King v Sash Windows (2018). In King, the ECJ held that a worker who had not taken any holiday during employment because his employer refused to pay for it, was effectively deterred from taking any annual leave and under Regulation 14 of the WTR must be permitted to carry over and accumulate that leave until the termination of their employment relationship. An argument before the Court of Appeal followed about whether the principle in King also applied to leave that was taken but unpaid. The Court of Appeal decided that it did.

So in cases where the worker's right to take paid leave is disputed or denied (which will usually only arise if the employer is treating them as self-employed), the Court of Appeal found that they only lose the right to take the leave at the end of the leave year if their employer can prove that they gave the worker the opportunity to take paid holiday, encouraged them to do so, and informed the worker that the right would be lost at the end of the leave year.

As a result, the 4 weeks of Mr Smith's unpaid 'Euro leave' in respect of each leave year carried forward into subsequent years and accumulated until his employment terminated, at which point the right crystalised. He was entitled to payment for all accrued but unpaid 'Euro leave' at the date of termination based on his normal remuneration while working.

The future of Bear Scotland Limited and Others v Fulton

In view of its decision on the effect of King, the Court of Appeal did not need to decide on the ERA time limit question – arising from the decision in Bear Scotland Limited and Others v Fulton – namely whether a series of deductions was broken by a gap of three months or more between holidays. However, obiter (non-binding) comments were made by the court suggesting that its 'strong provisional' view is that the decision in Bear Scotland is wrong.

The Supreme Court was due to make a decision on this point in the case of Agnew in June last year but it was stayed to allow for mediation so we will need to wait for another case before the law is settled on this.

What is the impact of the decision?

In summary, the position is as follows:

  1. If you engage contractors or self-employed workers who might be able to show that they are 'workers', be aware that they could bring claims for holiday pay on termination. In doing so, some may take a risk in relation to their tax status which may be a deterrent – but when IR35 status reviews take place, and self-employment is no longer an option for a contractor, a claim for holiday back pay could be attractive.
  2. If you have live holiday pay claims before the employment tribunal the time limit point is going to come up again. If Bear Scotland is wrong and the three-month gap is open to scrutiny, claims from current employees or workers for unpaid or underpaid holiday may only be subject to the maximum two year back pay restriction, and they will not have to prove that there was no three-month gap to break the chain of deductions.

For more information on any of the issues raised in this blog, please get in touch with a member of the employment and immigration team.