Last month’s Court of Appeal judgment in Pimlico Plumbers v Smith ruled that the right to take paid annual leave does not necessarily lapse but can carry over and accumulate until the contract ends. Holly Milne examines the detail of the ruling
In 2018 the Supreme Court ruled in Pimlico Plumbers and another v Smith that an individual engaged by Pimlico Plumbers between 2005-2011 had been incorrectly classed as self-employed rather than a worker.
Last year the Employment Appeal Tribunal upheld the employment tribunal’s 2019 ruling that Smith had not filed his claim for backdated holiday pay quickly enough. Under tribunal rules, he should have made his claim for missed pay within three months of each holiday period, dating back to 2005.
However, last month the Court of Appeal ruled that Smith was entitled to be paid for up to four weeks’ paid leave in respect of every year he worked for Pimlico Plumbers, without limitation, where leave had been taken but was not paid. This meant that he should have received four weeks’ pay in respect of every year he worked for the company.
This significant ruling leaves employers vulnerable to claims by workers when their engagement with the company ends and the right to be paid for any untaken holiday crystallises.
Within the judgment Lady Justice Simler stated that in order to discharge the employee’s right to claim without limitation, meaning that workers would only be able to claim for any unpaid leave in respect of the current holiday year, an employer needs to show it has:
- specifically and transparently given the worker the opportunity to take paid annual leave
- encouraged the worker to take paid annual leave and
- informed the worker that the right would be lost at the end of the leave year.
If this burden is not met, then the right to take paid annual leave does not lapse but carries over and accumulates until termination of the contract, at which point the worker is entitled to a payment in respect of the untaken leave.
What is the risk for employers?
There is a risk that organisations may face an influx of claims by any workers who have received an underpayment of holiday pay even if it has been some time since the worker last took holiday.
Claims by workers could be in respect of up to four weeks’ paid leave (the EU-derived annual leave provision) for every year worked, without a limitation of how many years such leave has been unpaid as the normal two-year backstop does not apply.
This means that the financial burden on businesses could be significant – in the case in question the individual was awarded £74,000 of holiday pay over his six years’ service.
Although the right to be paid only crystallises when individuals leave their job it could be a risky strategy to not take steps prior to that happening given how much the financial burden can build up over time.
To avoid any future risk there are four key steps employers can take:
1. Consider contract wording
Review the wording found within the holiday clauses in any contracts and contractual policies. Is it clear whether holiday can be carried over and if so the rules that are in place regarding the carryover of annual leave. Wording can be included that encourages individuals to take annual leave, helping to discharge the burden under point 2 above. The documents can also specify if there are specific periods over which holiday is required to be taken, for example over the festive period.
2. Review current relationships
This recent ruling is of particular relevance for companies who have workers that have been incorrectly classified as self-employed as any risk is linked to the paid holiday rights for workers. Relationships and the way businesses use and interact with their contractors will often evolve over time.
Businesses should therefore periodically review the employment status of their workforce to ensure that individuals have been correctly classified, and reclassify if need be. This will make sure that employers are aware of any potential claims those they engage may have and the financial ramifications.
Determining employment status is a very fact sensitive matter and should not be based simply on the label that has been placed on the relationship, with the Supreme Court recently confirming in Uber v Aslam (2021) that the contract should not be the starting point.
3. Mitigate future risk
Communication is key to discharging the burden outlined above: employers need to ensure they are communicating with their workforce. Beyond any wording in a contract or holiday policy, employers need to guarantee that workers are aware of any paid annual leave policy.
To discharge the burden as an employer, businesses need to make sure that they are encouraging individuals to take leave in addition to ensuring they are providing them with an opportunity to do so. This is something that is simple to do, but can easily be overlooked.
Given the potential financial burden that these claims could pose on businesses, if undertaking any form of merger or acquisition buyers will want to make sure that appropriate due diligence and warranties or indemnities are included within any sales to ensure they are protected against future liability.
4. Be wary of calculations
Ensure that any paid leave has been correctly calculated, this is especially the case if workers have variable hours or other pay elements such as overtime or commission that may need to be taken into account.
The key points that companies can learn from the recent judgement on this case is that they need to make sure that individuals are given the opportunity to and kept informed of any rights they have around paid leave. If employers can show that they have met the burden laid out by Court of Appeal, then their liability for potential claims significantly decreases.