Businesses face risk of increased holiday pay claims

What is the latest holiday pay decision? 

In Smith v Pimlico Plumbers, the Court of Appeal decided that when someone was engaged as a self-employed person but subsequently found to be a ‘worker’ they can claim the statutory holiday pay that would have been due in each year from their start date and that it made no difference if they had actually been on holiday at any time.

What was the background to the Smith v Pimlico Plumbers case?

Mr Smith had been engaged as a self-employed plumber for several years before ill health had led to the working arrangements coming to an end. He brought proceedings in which he successfully established that despite the terms of the written contract indicating otherwise he was a ‘worker’ and had statutory employment rights largely due to the requirement for him to carry out the work personally.

What happened to Mr Smith’s holiday pay claim?  

Mr Smith’s claim for holiday pay going back over the six years that he was engaged was initially dismissed on the grounds it had been brought too late. Each year he had notified Pimlico of the dates when he would be on holiday and not available. It had been held he should have made a claim for the pay due within three months of the holiday being taken.

However, the Court of Appeal has now found that taking unpaid holiday in circumstances where the employer has not provided any facility to take paid leave will not trigger the time limits for bringing a claim. Instead, the right to the holiday pay will accrue and carry over from year to year until the contract is brought to an end. 

What does this mean for businesses?

The result is that any business that has ‘self-employed’ contractors on their books are at risk of facing claims going back several years for backdated holiday pay when the working relationship comes to an end.

When would a contractor have to bring a claim?

A claim would need to be brought in the Employment Tribunal within three months of the contract coming to an end. This may be extended by the period ACAS Early Conciliation and where it is decided that it was not reasonably practicable to bring the claim within the three-month time limit.

How much could the claim be worth?

There is no limit on the amount that can be claimed. The carry over entitlement will be limited to four week’s pay for each year the contract lasted and then a pro-rata amount of 5.6 weeks in the final year. The weeks’ pay will be calculated based on the average pay over a 52-week period.

Isn’t there two-year limit on how far claims can go back?

Claims for unlawful deductions from wages are subject to a two-year limit on compensation. However, this decision shows that a claim in respect of holiday pay where no facility has been provided to take paid leave can succeed under the Working Time Regulations 1998 which is not subject to the same limitations. 

What steps can be taken to reduce the risk of claims?

Considering the terms on which contractors are engaged may be the best way to reduce the risk. If possible, remove the requirements for personal service so that it can be carried out by a substitute. This will need to be more than a paper exercise though as evidence will be needed that this can actually be done in practice. Alternatively consider whether it might be better commercially to budget for holiday pay and accept the individual has worker rights so that the potential liability does not continue to accrue. 

Does this apply to all workers?

The usual rule is that statutory holiday rights will be lost if not taken in the year that they accrue. The exception highlighted in this case is where there has been no facility granted to take paid leave.  Where workers have simply not taken the paid holiday, they had been granted it will not carry over. 

Does the decision have an impact on other claims?

Comments made in the judgement have cast doubt on whether a gap of three months should break a ‘series of deductions’. This could have an impact on other claims for unlawful deductions from wages where sums have repeatedly not been paid. A claim has to be brought within three months of the last deduction. If a three-month gap does not break the series it is possible that a claim might be able to extend over a much longer period.