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Holiday pay latest - worker entitled to compensation for unpaid annual leave

Posted: 03/02/2022

In a ruling that will be of significant importance to employers and workers, the Court of Appeal (CA) has this week overturned the decision of the Employment Appeal Tribunal (EAT) in the case of Pimlico Plumbers v Smith, finding that workers who are denied the right to paid annual leave are entitled to compensation for all unpaid annual leave they have taken, with no time limit. Whilst the decision will be primarily of interest to those operating in the gig economy, its effect could be far wider, and impact on claims for unlawful deductions from wages more generally.

In 2018, following lengthy litigation, the Supreme Court found that Mr Smith was a worker of Pimlico Plumbers and was therefore entitled to rights such as paid annual leave. Having established his worker status, Mr Smith brought separate proceedings against Pimlico Plumbers for holiday pay, on the basis that during his six-year engagement with Pimlico Plumbers all the leave he had taken was unpaid as his worker status had not been recognised.

The 2018 European Court of Justice case of King v Sash Window Workshop Ltd had already established that any leave which had not been taken by a worker during a leave year due to the fact it would be unpaid could be carried over indefinitely. The Employment Tribunal and EAT both found in this case that this principle did not, however, extend to leave which had been taken, and therefore dismissed Mr Smith’s claim. Even if Mr Smith were able to bring his claim on that basis, his claim was out of time given the time that had lapsed since the relevant leave was taken. Furthermore, the EAT decision in the 2014 case of Bear Scotland v Fulton prevented him from bringing claims in respect of a ‘series of deductions’, where there was more than a three month gap between the relevant deductions.

On appeal, the CA overturned the decision of the earlier courts, and ruled that the principle laid down in the Sash Window case could apply not only to leave which has not been taken, but also to any leave which was taken but which was unpaid. On termination of his employment, Mr Smith was therefore entitled to a payment in respect of all unpaid leave taken in each leave year in which he was engaged. As this claim did not crystallise until the termination of his engagement, and not at the time the relevant leave was taken, Mr Smith’s claim was not out of time.

Given these findings, the CA was not required to consider whether the claims were subject to the Bear Scotland principle that a ‘series of deductions’ is ended by a gap of three months.  However, the CA commented that whether or not deductions should form part of a series ‘is a question of fact and degree, based on the evidence’, rather than merely a question of time. This comment was made on an ‘obiter’ basis which means that it is not legally binding on other courts and tribunals; however, it may well lead to other courts choosing not to follow the Bear Scotland decision, and allowing claims for unlawful deductions from wages which fall outside the three month limit. This could have a considerable financial impact on employers who have been able to rely on the Bear Scotland rule to reduce the scope of such claims.

The case will now proceed to a remedy hearing to determine the level of compensation.

It is important to note that this decision, and that in the Sash Window case, only apply to the four weeks’ leave under the European Working Time Directive, and not to the additional eight  days granted by the UK Working Time Regulations, or to any additional contractual leave granted by an employer. Therefore, a maximum of four weeks’ leave in any leave year will roll over into the next leave year.

Significantly for employers, and in contrast to the position in relation to sickness absence, leave can be carried over indefinitely, so workers can claim compensation for all unpaid leave in any leave year, whether taken or untaken, for the duration of their employment, so long as a claim is brought within three months of the date of termination. The CA’s judgment means that the two year limit on unlawful deductions from wages claims under section 23(4A) of the Employment Rights Act 1996 will not apply to such claims.

This decision will be welcomed by all workers who are denied the right to paid annual leave. It also applies to any other unlawful deductions from wages claims, not only those for holiday pay. The risk to employers of denying an individual worker status is therefore significant. It is certainly possible that Pimlico Plumbers will attempt to appeal this decision and the Supreme Court may yet have the final say on this important issue. For now, however, tribunals will be required to follow this ruling of the appellate court. Employers who have incorrectly identified their workers as being self-employed could face potentially significant back pay claims as a result, and the full impact of this decision on unlawful deduction from wages claims more generally is yet to be determined.

For further information on how this issue might affect your organisation, please contact Paul Mander or your usual Penningtons Manches Cooper contact.

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