Fri 04 Feb 2022

Two sides of the same coin: Court of Appeal upholds aggregated claim to paid annual leave in landmark decision

A further landmark holiday pay case was decided by the Court of Appeal on 1 February 2022 in Smith v Pimlico Plumbers Ltd. Once again, we see the entitlement to paid annual leave during employment as being seen through the lens of being necessary for the health and safety of individuals.

Given the importance of this judgment, it is safe to say that the potential ramifications of this decision, not least in the gig economy, are still being digested and will become clearer over coming months, but in this short Q+A, we start to explore some of these.

Q. I’ve seen a lot of cases involving these parties; how does this case sit with the other previous cases?

Mr Smith had previously been involved in long-running litigation against the same Respondent, in an attempt to establish that he was a worker and so had the right to paid annual leave. Pimlico said he was a self-employed contractor and so did not have that right. The status claim reached the Supreme Court which found in Mr Smith’s favour, in other words, that he was a worker within the definition of the Employment Rights Act (section 230(3)) and the Working Time Regulations (WTR)( Regulation 2(1)). That meant he had the right to paid annual leave, something he was never given during the almost six years he was engaged by Pimlico.

Q. What were the main issues for the Court of Appeal and what did they decide?

The Court of Appeal identified 3 central issues, being:

1. Did the tribunals below err in law in holding that Mr Smith’s only pleaded claim was for pay for the holiday leave he actually took (without pay) during his engagement with the respondent?

Note that his claim for leave taken without pay was out of time. Mr Smith’s position was that he had three further holiday pay claims which “crystalised” on termination and so were in time compared to time running from the date of the last non-payment of annual leave. The three further claims he argued in his original case were: a) a pro-rated claim for leave not taken in his final leave year and which he was due under domestic law in terms of Regulation 14 of the WTR; b) an aggregated claim across all leave years of all untaken leave, in line with King (see below); and c) a claim for leave taken but not paid.

Decision: The Court of Appeal decided that the tribunals were correct in their finding. His claim related to leave taken but this was not the last word on this point!

2. What is the scope of King and do the principles it establishes mean that Mr Smith, whose employer denied his worker status, disputed the right to paid leave and refused to remunerate leave in breach of the WTR and WTD, was entitled to carry over and accumulate his entitlement to paid annual leave until his engagement with the respondent was terminated?

Decision: The Court of Appeal found King did have that meaning for Mr Smith, in contrast to the Employment Tribunal and EAT which had held (wrongly according to the Court of Appeal) that the principles of King were confined to cases of leave not taken.

3. Is a “series of deductions” within the meaning of section 23(3)(a) ERA broken by a gap of three months or more? That is the Bear Scotland issue.

Decision: The Court of Appeal’s strong provisional view (albeit obiter) was that Bear Scotland was wrongly decided on this point.

Q. Remind me what the case of King was about?

King v Sash Window was the first time that the CJEU had to consider the rights of a wrongly categorised self-employed individual who had not taken any steps during employment to claim for paid annual leave and who, on termination, asserted a right to a “backlog”, if you like, to paid annual leave never taken. Mr King was successful.

In summary: he didn’t have to take leave first before arguing the right to be paid for it and in such circumstances he could aggregate several years’ worth of annual leave entitlements he had been denied, the “use it or lose it” rule in Regulation 13(9) of the WTR fell away; the two-year backstop for unlawful deductions claims in section 23(4A) of ERA did not apply and the Bear Scotland limitation would also not apply.

The application of King to the case in hand was the subject of lengthy submissions in the Court of Appeal.

Q. Why was Mr Smith successful?

Mr Smith succeeded in his appeal. Understanding why is crucial to assessing the wider implications of the decision.

The Court of Appeal refused Mr Smith’s appeal for a wider interpretation of the claims he had actually brought. A fair reading of the pleadings (which pre-dated the CJEU decision in King) showed the claim did not encompass a claim for payment of leave not taken, both in respect of the final leave year or throughout the engagement.

That said, looking at the CJEU decision in King, the Court of Appeal noted in particular that the CJEU had observed in King that there can be no derogation from the right to paid annual leave, no preconditions to the exercise of that right should be set by Member States and crucially, right to annual leave and a payment are two aspects of a “single, composite legal entitlement to paid annual leave”.

They are in essence two sides of the same coin and it would be incompatible with the right to paid leave (and indeed infringe that right) for a worker to have to take that leave without pay and then bring a claim for non-payment.

A worker who takes such disputed leave (i.e. is unpaid) would be prevented from exercising the single composite right to paid annual leave for a reason beyond their control, akin to cases where an individual is prevented on the grounds of sickness from taking annual leave.

Returning to the specific pleadings in Mr Smith’s claim, looked at from this perspective, inherent in Mr Smith’s claim form was a claim that he was denied the single right to paid annual leave because this was disputed by his employer. It was not necessary for Mr Smith to have specified whether the claim was for paid leave untaken or taken but unpaid.

Q. You mention Bear Scotland; remind me of the rule which came out of that case?

In Bear Scotland v Fulton, the Employment Appeal Tribunal, in a somewhat controversial decision, held that a series of deductions was broken by a gap between underpayments of 3 months or more and necessitated Claimants lodging (or amending) claims every 3 months to avoid being out of time. The Northern Ireland Court of Appeal held that was wrong (in Agnew) but the Agnew case has not so far been heard by the Supreme Court due to attempts at settlement.

Q. And what did the Court of Appeal in Smith say about Bear Scotland?

The Court of Appeal did not need to address the issue to decide this case but, as requested by counsel for the Claimant, did deal with it. Their “strong provisional view” is that Agnew is correct on this point in that “a series is not ended, as a matter of law, by a gap of more than 3 months between unlawful deductions.”

Q. What does this actually mean for my business?

  • The stakes of getting the status of those working for you correct just got higher.
  • On that front, see our article on the Supreme Court decision in Uber. To take an example, let’s suppose you engage a consultant or self-employed contractor over a 10-year period. When that relationship ends, the individual may establish worker status and if so, can claim for 40 weeks’ holiday pay, being the 4 weeks’ EU leave (Reg 13 leave) per year of service and putting to one side the extra 1.6 weeks’ paid leave provided for in the UK WTR (Regulation 13A leave). Multiply that by the number of borderline status cases you may have and the numbers get pretty significant and the two year backstop on claims introduced under section 23(4A) of ERA falls away under the Court of Appeal’s decision.
  • Even for individuals that you accept have annual leave entitlement (employees/workers) then your obligation as an employer to discharge that right is more involved than perhaps first thought. As an employer, you need to do (and be able to show you have done) the following to be able to rely on what is commonly referred to as “use it or lose it”:
    • Ensure in a specific and transparent way that the worker is in a position to take paid annual leave.
    • Encourage the taking of paid annual leave, formally if necessary to do so.
    • Inform the worker in good time that if the leave is not taken by the end of the reference period (or carry over period), it will be lost.

If you don’t do that, the annual right does not lapse and unfulfilled entitlement carries over and accumulates until the contract ends.

  • A mistaken (even if genuine) belief that an individual is self-employed and has no right to paid annual leave will be no defence if that belief is wrong and they later establish worker or employee status.
  • If Bear Scotland is soon to be “no more” then this has implications not just for gig economy status cases but for any case where the calculation of holiday pay (which should be “normal remuneration”) is disputed. In a TUPE or acquisition context, there will need to be even greater consideration to the scale of potential holiday pay liabilities and an appropriate commercial landing point found, such as through warranties, indemnities, retentions or adjustment to price.

Q. Is there a Brexit angle here?

Only a limited one at the moment. The supremacy of EU law no longer applies to any enactment or rule of law passed or made on or after 31 December 2020 (IP completion day) and after then, the EU Charter is not part of domestic law (section 5(4) EU Withdrawal Act 2018). The Brexit effect is limited here though because:

The supremacy principle continues post IP completion day where relevant to the interpretation of any enactment pre-dating IP completion day.

Section 5(4) does not apply where proceedings are begun before IP completion day but not decided until after, as is the case here.

Although the EU Charter has essentially gone from domestic law, fundamental rights or principles that exist outwith the Charter are retained.

Q. What’s next on the holiday pay horizon?

This is certainly not the last word in the quickly evolving space of holiday pay litigation.

First of all, we will need to wait and see if there is an appeal to the Supreme Court by Pimlico and secondly, what happens in the Northern Irish case of Agnew which we understand was delisted for settlement/mediation.

Subject to that, we await with interest how the Employment Tribunals and Employment Appeal Tribunals will now treat similar cases. Will they decide not to follow Bear Scotland? That seems to be the direction of travel albeit we must remember that the strong views from the Court of Appeal about Bear Scotland being wrongly decided were obiter and not part of the basis of the decision, so in theory, Bear Scotland remains binding on Tribunals – it remains to be seen how this will develop.

We also await the detail behind the Government’s Brexit Freedoms Bill which may seek to address the status of retained EU law.

We also anticipate cases around the relatively recently introduced right under Regulation 13(10) WTR to carry over annual leave into the subsequent two leave years because it was not reasonably practicable to take the leave because of the coronavirus pandemic. Together with the rights flowing from this most recent Gary Smith decision, the scope for holiday pay claims has significantly increased.

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