365: Are independent contractors able to recover historic holiday pay from their employers?

Although still subject to appeal, the Smith v Pimlico Plumbers decision presents a significant risk for businesses; if contractors are found to be workers with entitlement to paid leave, employers need to be aware of historic holiday pay claims. In this article, we look at the facts of the case more closely.

In the long-running case of Smith v Pimlico Plumbers, Mr Smith worked for Pimlico Plumbers as a plumber and heating engineer for about six years. He was treated as a self-employed contractor and had no entitlement to holiday; however throughout his engagement he took periods of unpaid leave. When his contract was terminated following a dispute, Mr Smith brought various Employment Tribunal claims, including a claim for accrued holiday pay of £74,000. The preliminary issue of his employment status went all the way to the Supreme Court which ruled in 2018 that he was a worker, not an independent contractor. This meant that he was entitled to 5.6 weeks’ annual leave, and his holiday pay claim returned to the Tribunal.

The European Court of Justice (ECJ) 2017 decision in King v Sash Window Workshop Ltd is crucial to understanding Mr Smith’s case. In this case, Mr King was a self-employed contractor who was also held to be a worker. He had taken no holiday at all during his 13 years’ engagement because his employer did not offer him paid leave. The ECJ held that where an employer has failed to give a worker the right to paid leave, the worker can carry over and accrue untaken leave until the end of their engagement, when they can claim payment in lieu for the whole amount. It should be noted that Mr Smith’s case differs slightly because unlike Mr King, he actually took holiday, although he was not paid for it.

In Smith, the Employment Tribunal and the Employment Appeal Tribunal (EAT) previously dismissed Mr Smith’s claim as out of time, ruling that the principles established in the Sash Windows case only applied where holiday had not been taken at all. However, the Court of Appeal has now ruled that Mr Smith can recover compensation for his entire accrued holiday entitlement going back to the start of his contract. In making their decision, the Court of Appeal reiterated the underlying health and safety purpose behind paid annual leave entitlement. Failing to provide paid holiday detracts from the rest and relaxation element and deters workers from taking it. Overturning the EAT’s decision, the Court of Appeal held that the principles in the Sash Windows case applied to both unpaid leave that had been taken and unpaid leave that had not been taken. The Court also held that the right to paid leave is a single composite right. Pimlico Plumbers had prevented Mr Smith from taking leave throughout his employment. On termination, he was therefore entitled to be paid in lieu for all his accrued annual leave. It is important to note, however, that this decision only applies to the four weeks’ paid holiday entitlement under the EU Working Time Directive. The amount of Mr Smith’s compensation will be determined when the case returns to the Employment Tribunal for a remedy hearing.

The Court of Appeal does not have the power to amend legislation but issued an appendix to its judgment providing wording to be read into Regulation 13 of the Working Time Regulations 1998:

‘Where in any leave year an employer (i) fails to recognise a worker’s right to paid annual leave and (ii) cannot show that it provides a facility for the taking of such leave, the worker shall be entitled to carry forward any leave which is taken but unpaid, and/or which is not taken, into subsequent years’.

The Court of Appeal’s latest decision has held that Mr Smith is entitled to compensation for unpaid holiday pay relating to the whole of his six-year engagement with Pimlico Plumbers. Although subject to appeal, this is a significant decision which means that gig economy employers and any organisations who engage independent contractors now need to reassess their potential exposure to employment status and holiday pay claims.

This case is an important judgment for employers who might have denied workers the right to paid annual leave potentially going back many years; it could possibly expose them to the risk of costly claims and significant financial exposure. It is not a defence that an employer honestly believed the individual was not a worker. The Court of Appeal also reminded employers that they should inform workers of their right to take their paid annual leave entitlement and actively encourage them to take it.