News & Insights

Holiday pay rules – more change!

Mr Smith worked at Pimlico Plumbers Ltd (‘PPL’) from August 2005 until May 2011. After the relationship ended, Smith brought a number of claims, including those in relation to unpaid annual leave and breaches of the Working Time Regulations (“WTR”). PPL defended the claims, disputing Smith’s employment status, saying that he was an independent contractor who had no right to paid annual leave. The litigation escalated through the courts until the Supreme Court finally decided in 2018 that Smith was a worker, and his claims were remitted to the employment tribunal.

Smith’s struggles were not, however, over. The employment tribunal dismissed his claims, stating that under the basic principles of the WTR his claims had not been brought within three months of the most recent deduction or refusal so were out of time. When deliberating, the tribunal considered whether the ruling in King v Sash Window Workshop could be applied, which would allow an interpretation of the WTR that Smith’s payments became due on termination and that his claims were brought in time. It decided, however, that the facts in King were distinct and could not be applied – in King the right to take annual leave had been denied, but in Smith, the leave was allowed but unpaid. The tribunal said that a narrow interpretation in keeping with these differences was required and, on initial appeal, the EAT agreed.

Undeterred, Smith appealed to the Court of Appeal (“CoA”) against this finding. In 2022, some 11 years after he parted ways with PPL, Smith finally got what he was looking for.

The CoA held that the principle established in King should be given a much wider interpretation. Not only did it decide that the earlier cited ‘differences’ were not to be a bar to the success of the claim, it also determined that when a worker has been prevented from taking annual leave, instead of losing the right to it after a period of time as has been the current situation, annual leave can in fact be carried over indefinitely. Importantly for Smith, that principle also applied to unpaid annual leave which is taken but not paid. As a result, Smith was awarded compensation for all unpaid leave throughout his entire working period.

In some unbinding yet important comments, the CoA also considered the decisions in Bear Scotland Ltd v Fulton against Northern Ireland v Agnew. These two cases had looked at whether unauthorised deductions claims could encompass earlier periods of holiday as a ‘series of deductions’ under s.23 Employment Rights Act. Bear Scotland found that that a gap of more than 3 months between deductions prevented the deductions forming part of a ‘series’, whereas Agnew found that it did not. Bear Scotland has been widely followed and applied by employment law practitioners ever since, however the CoA’s ‘strong provisional view’ was to steer in the direction of Agnew which may be sufficiently persuasive to displace the Bear Scotland ruling altogether in future cases.

Take away points: With serious doubt cast upon the effectiveness of the 3-month gap and the potential for claims to cast themselves back over the entire duration of an engagement, only crystalising upon termination, businesses will want to look at this carefully. While it is important to note that all of this only applies to the basic four-week entitlement under the Working Time Directive, this still has potential for valuable claims that could be very difficult for businesses to defend.

Some of the advice here is not new. Businesses should still pay attention to ensuring that the correct employment status is identified from the outset of a relationship and avoid the temptation to engage individuals as self-employed when this is not genuinely the case. It will not be enough for businesses facing these cases to argue that they honestly believed people to be self-employed if the courts find otherwise.

The CoA did, however, helpfully confirm that an individual will lose the right to paid annual leave if they have been given the opportunity to take it. The burden for demonstrating that this opportunity has been given falls upon the employer, so it is advisable that you put in steps to prove that you have:

  1. given workers the opportunity to take paid leave;
  2. encouraged them to take it; and
  3. informed them that it will be lost if not taken at the end of the leave year.

Businesses may also want to carry out a risk assessment of any failings in this regard if planning a sale of the company, as failings of this nature may cause a potential buyer concern.