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Holiday pay: The right to be paid for annual leave that has been taken on an unpaid basis carries over to the next holiday year

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By Hilary Larter & Ceri Fuller


Published 04 February 2022


In an important case on holiday pay, the Court of Appeal has held that workers who have taken annual holiday on an unpaid basis can carry over the right to be paid for annual leave from one holiday year to the next and be entitled to be paid it on termination of employment.


The facts

Mr Smith worked for Pimlico Plumbers as a plumbing and heating engineer from August 2005 until 3 May 2011. During his six-year engagement with Pimlico Plumbers he was never given any right to paid annual holidays. Throughout that time, Pimlico Plumbers maintained that Mr Smith was a self-employed contractor and not a ‘worker’ within the scope of the Working Time Regulations 1998 (WTR) and so had no entitlement to paid annual leave.

Mr Smith did, however, routinely take annual leave, but he was not paid for it. The last occasion on which he took unpaid holiday before his contract terminated was between 18 December 2010 and 4 January 2011. On 3 May 2011, Mr Smith’s contract was terminated. On 1 August 2011, Mr Smith presented an employment tribunal claim alleging he had been a worker and therefore entitled to be paid in respect of the four week statutory leave to which he was entitled under European legislation.

The Supreme Court decided Mr Smith was a worker. The issue of how much holiday pay he was entitled to then returned to the employment tribunal.

The employment tribunal found that Mr Smith’s holiday pay claim was out of time because the last period of leave ended more than 3 months before Mr Smith had presented his claim (although the claim was brought within three months of the termination of his engagement with Pimlico Plumbers). Mr Smith appealed unsuccessfully to the Employment Appeal Tribunal (“EAT”). He then appealed to the Court of Appeal, which has now upheld his appeal, reversing the tribunal’s decision.


What did the court of appeals say?

The court looked at the correct interpretation of the King v Sash Window Workshop case. In King, the European Court of Justice (“ECJ”) considered the situation where a worker had 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.   Mr Smith argued that this principle 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 Court of Appeal held that the right to payment for unpaid leave does extend to workers (such as Mr Smith) who have taken their leave but have not been paid for it. Significantly it held that the worker will only lose the right to paid leave when the employer has given the worker the opportunity to take paid annual leave, encouraged them to do so, and informed them that the right would be lost at the end of the leave year. If the employer has not done so, the right does not lapse but carries over and accumulates until the termination of the contract, at which point the worker is entitled to a payment for all the unpaid leave. Provided that the claim for payment is made within a period of three months from the date of termination, it will be in time. The employment tribunal had therefore been wrong to hold that the principles in King did not apply to Mr Smith’s case and also wrong to hold that his claim was out of time.

The Court of Appeal also commented on the decision in the case of Bear Scotland v Fulton. The EAT in Bear Scotland held that claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments (i.e. here the periods of leave). This resulted in a significant limitation on workers’ ability to bring historic holiday pay claims. The Court of Appeal in the Pimlico Plumbers case cast doubt on the Bear Scotland judgment. These comments are not binding, because it was not necessary for the Court of Appeal to make a finding on this point, however, they are powerful and may well be significant for future cases.


What does this mean for employers?

This case only applies to the annual entitlement to the four weeks’ paid holiday leave granted by European legislation, not to the additional 1.6 weeks’ leave mandatory under UK legislation or to contractual holiday pay over and above this.

Despite this, this case is likely to have a significant impact on employers and workers who are in dispute over historic holiday pay, particularly those where there is a dispute about the worker status of the individual.

As it stands, this judgment means that there is no carry over limit. Individuals who have not received payment for annual leave because their employer wrongly classed them as self- employed rather than a worker will now be able to recover compensation for 4 weeks leave each year going back to the start of their employment or when the WRT came into force in 1998 if later.

Where this case or the King case applies, it looks like employers will be unable to rely on the two year back stop for recovery of unlawful deduction from wages where an individual is denied a right to paid annual leave, provided that the claim is brought within three months of termination.

The Court of Appeal’s comments about the Bear Scotland case will also be concerning for employers who may face disputes about holiday pay. While the comments are not yet binding, they do suggest that the case will be challenged by workers or their unions in the future.

Where worker status is admitted, employers should make sure workers are told that they are entitled to paid holiday, that they will lose the entitlement if it is not taken by the end of the holiday year, and that they are encouraged to take the holiday. This is usually set out in a policy dealing with holiday entitlement, or in the workers’ contracts.

Brexit has no impact on these risks since this decision reflects EU law as at the date the UK withdrew from the EU and such EU based law continues to apply.

It is unclear at this stage whether Pimlico Plumbers will appeal to the Supreme Court but we will keep you updated.


Gary Smith v Pimlico Plumbers Ltd