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What is a worker’s right to unpaid holiday pay on termination of employment?
The Court of Appeal in the case of Mr Gary Smith v Pimlico Plumbers Ltd has recently considered whether a worker is permitted to carry over and be compensated for annual leave that has been taken, but not paid following the termination of engagement with his employer because his employer failed to recognise that he was a worker and entitled to holiday rights during his employment.
The Claimant worked for Pimlico Plumbers Ltd (“the Respondent”) from August 2005 to May 2011 as a plumbing and heating engineer. During his engagement with the Respondent, the Respondent held that the Claimant was a “self-employed independent contractor who had no entitlement to paid annual leave.” The Claimant still took leave, but each time he did it was unpaid. In May 2011, the Respondent suspended the Claimant and required him to return his equipment, the Claimant contended that this constituted a fundamental breach of contract and subsequently brought a claim to the Tribunal.
The Claimant brought a number of claims to the Employment Tribunal (“ET”), including one that he was a worker who was entitled to paid annual leave throughout his engagement. He sought compensation for the unpaid leave he had taken during his employment.
The first issue for the Tribunal to determine was the employment status of Mr Smith. The Supreme Court (“SC”) held that Mr Smith was a worker under the definition in the Employment Rights Act 1996 and the Working Time Regulations 1998.
After determining the above, the claim then returned to the ET to consider whether Mr Smith was entitled to payment in lieu for the leave he had taken but not been paid for during his engagement.
In the UK, workers are entitled to a minimum of 5.6 weeks’ leave per year. This is made up of 4 weeks’ leave under the Working Time Directive, derived from EU law (“EU leave”) and an additional 1.6 weeks’ leave under the Working Time Regulations 1998 (“WTR”).
Regulation 14 of the WTR provides for any compensation an employee is entitled to where his/her employment is terminated during the course of the year.
Both the ET and the Employment Appeal Tribunal (“EAT”) found in favour of the Respondent, finding that the payment in lieu would only be payable if the Claimant had not taken holiday during his engagement (rather than taking leave but not being paid for it).
The Claimant appealed the decision to the Court of Appeal (“CA”), who allowed the Claimant’s appeal. The CA held that a worker has a single composite right to “paid annual leave.” If a worker takes unpaid leave and his employer disputes this right, then the worker is not in fact exercising this right. A worker can only lose the right to paid annual leave where an employer can show:
- that they actually gave the worker the opportunity to take paid annual leave;
- encouraged them to take annual leave; and
- informed the worker that the right would be lost if they did not take it.
If the employer cannot demonstrate this, then the right of the worker to paid annual leave carries over until termination of their engagement, at which point the worker is entitled to compensation. The CA noted that the very purpose of annual leave is for the health and safety of workers and for rest and recouperation, failing to pay a worker for holiday is likely to deter an individual from taking their statutory entitlement.
The CA held that the Claimant was entitled to payment for all unpaid EU leave which he was entitled to during his engagement with the Respondent on termination of his employment with them.
This decision highlights the importance of correctly identifying the employment status of your workforce, in particular those working in the gig economy, as there have been a number of cases recently where employers have miscategorised the status of their workforce, the recent Uber case being one particular example. It may well be that those who you believe to be employed as a “self-employed contractor” are actually workers who could have claims for 4 weeks’ holiday pay per year from the start of their engagement up to termination, a potential significant liability.
Further, this case is particularly important as one of the Judge’s questioned whether the famous case of Bear Scotland is the correct application of the law nowadays. This is a longstanding, precedential case that limits claimants in claiming for backdated holiday pay, but this recent judgment and comments made by the judiciary suggest this may not be good law anymore. It could be that this will be overruled in the future, which could have significant implications in the payment of holiday pay, but we will have to watch this space.