Thu 17 Feb 2022

Misclassification of workers will be costly mistake

Court of Appeal holds worker was entitled to holiday pay going back through whole period of employment.

Having succeeded in persuading the Supreme Court that he was a worker, the claimant in Smith v Pimlico Plumbers had less success when his claim for holiday pay returned to be decided by the employment tribunal.  Both the tribunal at first instance and the Employment Appeal Tribunal (EAT) held that the claim for holiday pay had been brought out of time.  However, the Court of Appeal has overturned those decisions, holding that the claim is in time and that the claimant is entitled to claim for holiday pay going back through the entirety of his employment with Pimlico Plumbers.

In coming to its judgment the Court of Appeal considered the application of King v Sash Windows - a case in which the Court of Justice of the European Union held that a worker is entitled to be paid on termination for any periods of annual leave that had accrued during the employment but that had not been taken because the worker would not be paid for them.  This applies only to the 4 weeks paid holiday entitlement that arises under EU law, not the additional 1.6 weeks legislated for domestically under the Working Time Regulations 1998.  The right to the paid leave accumulates when the worker is not given the opportunity to exercise it, crystalising on termination of employment. This type of claim, brought under regulation 14 of the Working Time Regulations 1998 ("WTR"), is brought in time as long as it is lodged within 3 months of the date of termination of employment. 

The employment tribunal and EAT had been of the view that the principle in King did not apply to workers who had taken the holiday, even though it was unpaid.  This meant the claimant had to rely on an unlawful deduction from wages claim instead of WTR regulation 14.  The 3-month time limit for unlawful deduction from wages claims runs from the date of the last deduction, and not the date of termination.  In this case it meant that the unlawful deductions claim had been made out of time and was therefore dismissed. 

The Court of Appeal however was of the view that King should be read as extending to workers who had taken leave but not been paid for it, as well as those who had been discouraged from taking it because it was not paid.  Both these categories of worker had been prevented from exercising their right to "paid annual leave".   As this claim only crystallised on termination of employment it was in time, and the claimant did not need to rely on the late unlawful deduction from wages claim.

Although not strictly necessary given this claim succeeded as a WTR claim and not an unlawful deduction of wages claim, the Court of Appeal still went on to consider the case of Bear Scotland Ltd & Others v Fulton.  Bear was an EAT case that held that if a series of deductions was broken by a period of three months or more, that broke the series and any deductions made before that break could not be claimed.  The Court of Appeal indicated a "strong provisional view" that Bear has been incorrectly decided.  It is highly likely that this view will be referred to in future unlawful deduction of wages claims and that Bear will be formally overturned.  However, the two-year backstop for claims introduced by the Deduction from Wages (Limitation) Regulations 2014 (which apply to deductions claims but not to regulation 14 WTR claims) will apply.

The financial consequences of this judgment (unless appealed) for businesses that have misclassified workers may be significant.  Where workers have been unable to exercise their right to 4 weeks' paid holiday (or any part thereof) then their right will accumulate from year to year with no restriction, crystalising on termination of employment.  It is not a defence that the employer honestly believed the individual was not legally a worker, and there is also an argument that interest should be applied to the compensation due to the claimant.  The potential cost to businesses who have misclassified workers has just become very high indeed.

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