Holiday pay claims … tricky issues for employers and tips on how to manage risk

The Court of Appeal recently decided a ‘worker’ was entitled to receive a payment covering all of the periods during his engagement when he took holiday, but wasn’t paid for it.

The long running case of Smith v Pimlico Plumbers has already seen Mr Smith pursue his claim to the Supreme Court to establish that he was a ‘worker’ (and therefore entitled to holiday pay and minimum wage), rather than being classed as a self-employment contractor.  Having done that, he had to establish whether he was entitled to holiday pay based on his particular circumstances and the way he had bought his claim.

Whilst he worked for Pimlico Plumbers, Mr Smith took periods of holiday but, because he was regarded by the company as being self-employed, he wasn’t paid anything for them.  Earlier cases had established that holiday pay claims would succeed if a worker or employee had been deterred from taking holiday because they thought that they would not be paid for it.  In this case, Mr Smith hadn’t been deterred from taking periods of holiday, but when he did so, he received no pay.

The Court of Appeal’s view was that the right to paid holiday was a composite right – it could not be divided into separate elements of leave and pay.  The Court therefore concluded that Mr Smith was entitled to be paid for the periods when he had taken holiday but not been paid.  Because of the way in which Mr Smith had bought his claim – under the Working Time Regulations, rather than claiming that he’d suffered from a series of unlawful deductions from wages – the rules which give employers the ability to limit liabilities to 2 years’ shortfalls and the rule that a period exceeding 3 months between deductions would break that series – were found by the Court not to apply.

Understandably, this decision can be unsettling for many employers.  However, we’d recommend that you take the following steps:

• Assess worker status – be clear about whether any so-called “self employed” staff are in fact workers and therefore entitled to holiday pay.  This is a particular risk in the gig or contractor economies.
• Review your holiday policies and procedures – ensure that:
  • Workers who don’t use their entitlement by the end of the holiday year lose it and cannot carry it forward.  To do this, employers should give workers the chance to take their paid holiday and should actively encourage them to do so.  Employers should also make clear to workers that if they don’t take the holiday during the leave year, it will be lost.
• Consider settlement of any potential claims for backdated holiday pay – it’s not uncommon for employers to do this by making a lump sum payment in exchange for a binding waiver of claims under a settlement agreement or ACAS COT3 agreement.

Get in touch if you’d like us to review your holiday pay arrangements or the basis upon which you contract with non-employed staff.