Holidays: carry-over of right to payment
Smith v Pimlico Plumbers Ltd
A worker who took unpaid holiday because his employer refused to pay for it accumulated the right to paid annual leave for which he was entitled to compensation on termination.
Many will recall Mr Smith’s battle with Pimlico Plumbers (PP) which ended up with the Supreme Court ruling that he was a ‘worker’ for the purposes of the Working Time Regulations 1998 (WTR) and the Employment Rights Act 1996 (ERA) and could therefore pursue his holiday claims against PP.
Mr Smith’s substantive claim for unpaid holiday pay then returned to the employment tribunal. During his time with Pimlico he had regularly taken holidays but had not been paid for them. His last period of holiday was between 18 December 2010 and 4 January 2011. He left Pimlico on 5 May 2011 and began proceedings on 1 August 2011. Mr Smith sought to rely on the decision of the ECJ in King v Sash Window Workshop Ltd which he argued 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.
In King the ECJ held that workers must not be prevented from carrying over and, (where appropriate), accumulating until termination of employment, paid annual leave rights, which have not been exercised because the employer refused to remunerate the worker for that leave.
The tribunal held that Mr Smith’s claim was out of time because the last period of leave ended more than 3 months before Mr Smith presented his claim. Therefore his claims for pay in respect of holidays taken were dismissed. His appeal to the EAT was dismissed. The EAT held that King did not apply where leave was taken but unpaid. He appealed.
Mr Smith’s appeal only concerns entitlement to four weeks’ paid leave under the Working Time Directive (WTD), not the additional 1.6 weeks’ leave entitlement under the Working Time Regulations 1998.
Court of Appeal decision
The appeal was upheld.
The principles established in King – allowing the indefinite carryover and accumulation of the untaken part of the 4 weeks WTD leave due to those denied worker status in respect of their leave each year – were equally applicable to any taken but unpaid WTD leave. So whenever Mr Smith took leave but wasn’t paid for it, up to four weeks of that unpaid leave in respect of each leave year carried forward into the subsequent leave years and accumulated until termination of his employment. When his employment ended, a payment was due to him for all that carried over, unpaid leave, based on his normal remuneration while working. The exact amount will be determined when the case returns to the tribunal on remedy.
If a worker takes unpaid leave when the employer disputes the right and refuses to pay for the leave, the worker is not exercising the right to paid leave. A worker can only lose the right to take leave at the end of a leave year (where the right is disputed and the employer refuses to remunerate it) when the employer can meet the burden of showing that it specifically and transparently gave the worker the opportunity to take paid annual leave, encouraged the worker to take paid annual leave and informed the worker that right would be lost at the end of the leave year. Otherwise, the right does not lapse but carries over and accumulates until termination of the contract, at which point the worker is entitled to a payment in respect of the untaken leave.
The Court of Appeal also considered whether, for the purposes of an unlawful deductions from wages claim under the Employment Rights Act, a series of deductions is broken by a gap of three months or more. Its comments on this aspect of the case are what are called ‘obiter’ and not strictly binding. The EAT, in Bear Scotland Ltd v Fulton, held that unlawful deductions from wages in respect of unpaid holiday pay cannot be claimed as the last in a series of deductions where more than three months has elapsed between deductions. Contrastingly, the Northern Ireland Court of Appeal, in Chief Constable of the Police Service of Northern Ireland v Agnew, held that such a three-month gap did not break a series of underpayments of wages. (The Agnew case was due to be heard by the Supreme Court in 2021 but was stayed.) The Court of Appeal gave a clear steer that the decision in Agnew is to be preferred. Technically the Bear Scotland principle remains binding on tribunals but its days must now be numbered.
Link to judgment: https://www.bailii.org/ew/cases/EWCA/Civ/2022/70.html
Although these cases are aimed primarily at situations where employers deny that those who work for them are even workers, employers should take note of the steps they need to take to discharge their burden of proof that they have encouraged their workers and employees to take holiday. If they do not, and do not warn employees and workers that they will lose untaken holiday, then the four weeks 'EU' holiday will be carried over.
It is also worth drafting contracts and policies which make it clear that the employee/worker will use up their 4 weeks ‘EU holiday’ first.
It is unlikely that Brexit will make any practical difference to the effect of the Court of Appeal’s decision on any future cases. Firstly, the facts of the case arose before the European Union (Withdrawal) Act 2018, amended by the 2020 Act, and therefore the Court of Appeal applied the European Working Time Directive. Secondly, in terms of any claims arising after 2020, the Withdrawal Act provides that there is an on-going duty to interpret national law in line with EU law. It seems very likely therefore that the courts and tribunals will continue to interpret and apply the Working Time Regulations and our domestic law in line with the European Working Time Directive.
A postscript and appendix have been added to a revised version of the Court of Appeal’s judgment which sets out a revised formulation of WTR, reg. 13, 14 and 30. While the courts do not have power to ‘rewrite’ the WTR, the appendix’s formulation sets out the way in which the Court of Appeal suggests that courts and tribunals should read the WTR in order to be compatible with art. 7 of the Working Time Directive and related ECJ decisions in respect of the basic entitlement to four weeks of paid annual leave. It clarifies the circumstances in which the basic entitlement to four weeks of paid annual holiday may be carried forward into subsequent leave years. It sets out the full suggested reinterpreted wording of the WTR to take into account the Court of Appeal’s interpretation of the ECJ decision in King as well as other decisions in NHS Leeds v Larner and Plumb v Duncan Print Group.