No limit to carry over for unpaid as well as untaken holiday for workers denied right to paid holiday: Smith v Pimlico Plumbers (2)

The Court of Appeal has handed down its second judgment in Mr Smith’s long-running litigation against Pimlico Plumbers, in a decision which has significant implications for holiday pay. This decision considerably raises the stakes for businesses facing worker status disputes.

Mr Smith worked as a plumber for Pimlico Plumbers (Pimlico) for nearly 6 years. During that period, Pimlico treated him as being self-employed with no entitlement to annual leave. Mr Smith subsequently brought employment tribunal claims against Pimlico and in 2018 the Supreme Court confirmed that he had worker status during his engagement by Pimlico. This meant that he was entitled in principle to 5.6 weeks’ paid annual leave per year. Mr Smith had taken periods of leave from time to time, but always unpaid. His substantive claim for unpaid holiday pay subsequently returned to the employment tribunal.  Mr Smith sought to rely on the decision of the ECJ in King v Sash Window Workshop (King) which he argued entitled him to bring a claim in respect of all unpaid annual leave accrued throughout the period of his engagement by Pimlico, both taken and untaken. The tribunal held that the claim was out of time because the last period of leave ended more than 3 months before Mr Smith presented his claim. His appeal to the EAT was dismissed. The EAT held that King did not apply where leave was taken but unpaid.

The Court of Appeal upheld Mr Smith’s appeal. The judgment is of significance to all workers denied the right to paid annual leave and to all claims for unlawful deductions from wages.

At the heart of this case was the correct interpretation of the ECJ’s decision in King, in which the ECJ considered the situation where a worker has not received paid annual leave because his employer wrongly characterised him as self-employed, and the worker took no steps to invoke the right to paid annual leave until after the end of the employment relationship. The ECJ held that Mr King was entitled to compensation for untaken holiday throughout the employment relationship; the usual rule that holiday did not ‘carry over’ at the end of a leave year did not apply in these circumstances.

The Court of Appeal in Smith considered that although the worker in King claimed compensation for leave not taken, the ECJ’s decision was based on principles not confined to those facts. The ECJ emphasised the particular importance of the right to paid annual leave and that there can be no preconditions to that right. The ECJ also regarded it as clear that the right to annual leave and the right to payment for leave are two aspects of a single right, not two distinct legal entitlements. There is a right to be paid when the leave is taken as this enables the worker to have the necessary rest and relaxation which paid leave is intended to provide. A worker faced with uncertainty about whether he will be paid for leave when taking it was not regarded as being able to fully benefit from that leave as a period of relaxation and leisure. Such uncertainty was liable to dissuade the worker from taking annual leave. The well-established principle relied on by the ECJ was that the right to paid annual leave cannot be lost unless the worker has had the opportunity to exercise that right before the termination of the employment relationship.

The Court of Appeal considered that there is a clear analogy between workers who do not take leave and those who take unpaid leave where in both cases their contracts do not recognise the right to paid leave and their employers refuse to pay for leave. The decision in King was to be read as extending to cover workers who have taken leave but have not been paid for it. An employer who does not allow a worker to exercise the right to paid annual leave must bear the consequences. An arrangement or system where the worker’s entitlement to paid annual leave could be extinguished in these circumstances would, in effect, validate conduct by the employer which unjustly enriched the employer at the expense of the worker’s health. Where paid annual leave rights are not exercised over a number of consecutive reference periods because the employer disputed the right and refused to remunerate leave, rules or practices preventing the worker from carrying over an accumulating the leave until termination are precluded.

Therefore, Mr Smith’s entitlement to leave carried over until termination and his claim was not out of time because it was presented within three months from the end of his employment relationship with Pimlico.

The decision is authority for the principle that if a worker takes unpaid leave when the employer disputes the right and refuses to pay for the leave, the worker is not exercising the right to paid leave. A worker can only lose the right to take leave at the end of a leave year (in a case where the right is disputed and the employer refuses to remunerate it) when the employer can meet the burden of showing that it specifically and transparently gave the worker the opportunity to take paid annual leave, encouraged the worker to take paid annual leave and informed the worker that right would be lost at the end of the leave year. Otherwise, the right 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. The decision only applies to the 4 weeks’ leave provided by the Working Time Directive, not the additional 1.6 weeks provided under domestic law.

The Court of Appeal then went on to consider whether, for the purposes of an unlawful deductions from wages claim, a series of deductions is broken by a gap of three months or more. In Bear Scotland the EAT controversially held that a three month gap did break the series; the NICA in the Northern Irish case of Agnew held that it did not. The Court of Appeal did not have to decide this question, but indicated a strong provisional (obiter) view that a three month gap does not break the series. The Court considered that the existence of a three month time limit for bringing the claim is a weak basis for inferring that Parliament did not intend to link similar payments occurring more than three months apart. Technically the Bear Scotland principle remains binding on tribunals but its days must now be numbered.