Appeal decision affects holidays

Ruling has consequences for accumulated holiday pay, but potential for further action means issue isn’t settled

Amy Gordon
Amy Gordon, associate in Dentons’ Glasgow office and a member of its People, Reward and Mobility (PRM) practice group.
A legal update on holiday pay

The Court of Appeal has recently ruled that a worker who had taken unpaid leave, because their “employer” (Pimlico Plumbers) did not recognise their status as a worker, was entitled to bring a claim for all unpaid annual leave accrued during the whole engagement, including both the taken (unpaid) leave and untaken leave.

What rights do workers have to paid leave?

Under the Working Time Regulations 1998 (WTR), workers are entitled to 5.6 weeks’ paid annual leave a year. The decision of the Court of Appeal applies only to the four weeks leave which derive from the Working Time Directive, the European law which underpins the WTR.

The Court of Appeal has now held that the right to paid leave is not subject to any pre-conditions. There is no requirement for the worker to take the leave before the right to be paid for it arises. This means that taking unpaid leave does not discharge an employer’s obligation to pay workers for it.

Do workers lose the right to payment of annual leave from one year to the next?

The Court of Appeal has held that workers will only lose the right to payment of annual leave from one year to the next if an employer can show that they:
• gave the worker the opportunity to take paid annual leave;
• encouraged the worker to take paid annual leave; and
• informed the worker that the right would be lost at the end of the leave year.

To what does the Court of Appeal’s decision apply?

The Court of Appeal’s decision applies only to the four weeks’ statutory minimum leave to which workers (including employees) are entitled under European law. This is sometimes referred to as “Euro leave”.

As a result of this decision, unless an employer can meet the above test, a worker’s right to paid annual leave accumulates from year to year, and “crystallises” on termination. The worker can therefore bring a claim for a single payment covering all their leave on termination. This also means that the two-year backstop introduced in 2014 for claims brought on or after 1 July 2015 would not apply.

A worker wishing to bring a claim for payment for the additional 1.6 weeks’ leave under the WTR (assuming they had taken it) could include this in their claim for unlawful deduction from wages, but it would still be subject to the two-year backstop.

What impact will this decision have on employers?

This judgment could prove very costly to employers who have historically used a large number of consultants. Most consultants will want to remain self-employed and so would not be entitled to holiday pay.

However some, particularly in light of last year’s IR35 reforms, may consider that self-employment is no longer a viable option. That group might see some (financial) benefits in arguing that they have in fact been employees, or at least workers, and so are entitled to back-dated holiday pay. The potential bill for the Euro leave entitlement alone over a number of years could be steep.

Employers who make extensive use of contractors (particularly those who are not engaged through an intermediary) should re-assess the status of each and the potential liability to which this decision gives rise.

We expect Pimlico Plumbers will appeal to the Supreme Court, so it is unlikely we have heard the last on this issue.


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