In the long-running case of Gary Smith v Pimlico Plumbers Limited the Court of Appeal has overturned the earlier decisions and allowed Mr Smith's appeal. The Court held that the principle established by the Court of Justice of the European Union ("CJEU") in King v Sash Windows that untaken annual leave could be carried over indefinitely where the worker is deterred from taking leave because it will not be paid, applies equally to annual leave which is taken but unpaid.
It is worth noting the appeal only concerns Mr Smith's 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 ("WTRs").
Mr Smith worked for Pimlico Plumbers as a plumbing and heating engineer between August 2005 and May 2011. During the course of the engagement Pimlico Plumbers maintained that Mr Smith was an independent contractor and as such was not entitled to paid annual leave. Despite not being paid for leave, Mr Smith did take periods of unpaid annual leave. Following the termination of his contract, Mr Smith brought a number of claims including a holiday pay claim in relation to unpaid annual leave. The initial question to be determined was the employment status of Mr Smith; in 2018 the Supreme Court confirmed that Mr Smith was a worker, not an independent contractor.
With worker status confirmed, Mr Smith went on to pursue his claims.
King v Sash Windows – re-cap
In the case of King v Sash Windows the CJEU 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 effect of this decision was that the worker was entitled to carry forward accrued annual leave for the entirety of the period he had worked for the employer.
The Employment Tribunal
An Employment Tribunal subsequently dismissed Mr Smith's holiday pay claim on the basis it was brought out of time. The Tribunal held the CJEU decision in the case of King v Sash Windows did not entitle Mr Smith to claim in respect of holiday which had been taken but was unpaid. The key distinction was that Mr Smith had taken the annual leave, whereas the Sash Windows case concerned an individual who the courts held had been denied the opportunity to take leave, because he knew the leave would be unpaid, and so had not done so.
Mr Smith appealed to the EAT on the basis that the Employment Tribunal had erred in its approach to the Sash Windows case and that the claim was not out of time.
The EAT dismissed the appeal and found that the Employment Tribunal had not erred in its interpretation of King v Sash Windows. The Sash Windows case was not concerned with leave that was taken but unpaid as per Mr Smith's case. The carry-over rights set out in Sash Windows relate to leave that was not taken as a result of the employer's failure to remunerate such leave.
Mr Smith appealed to the Court of Appeal.
The Court of Appeal
Mr Smith's appeal has succeeded. Article 7(1) and Article 31 of the Charter of Fundamental Rights of the European Union ("the Charter") and King v Sash Windows establishes that the single composite right which is protected is the right to "paid annual leave". The Court held that a worker cannot be said to be exercising that right in a situation where they have taken unpaid leave when the employer has disputed the right and has refused to make a payment for such leave.
Domestic legislation can permit for the loss of the right at the end of a leave year – however this is only when the worker has actually had the opportunity to exercise the right conferred on them by the WTD. An employer must meet the burden of demonstrating 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 the right would be lost at the end of the leave year if not used. If the employer is unable to meet this burden, the right will not lapse and will instead carry over and accumulate until the termination of the contract. At the point of termination the worker is entitled to a payment in respect of the untaken leave.
The Court of Appeal went on to find that a claim to payment for all the leave which Mr Smith took but was unpaid was inherent in his pleaded case. This failure to make payment was a breach of his right to paid annual leave.
This case will have a significant impact on employers engaging so-called "self-employed contractors" whether in the gig economy or more widely. We've seen a number of cases where this status has been successfully challenged and individuals working in the gig economy have been classed as workers and are therefore entitled to holiday pay. These workers will potentially be able to claim holiday back pay dating back to when they started work (or 1998 when the WTRs were introduced).
The three month gap - In obiter comments the Court of Appeal has also brought into question the EAT's decision in Bear Scotland Limited v Fulton which established the principle 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. Many claims are out of time or limited following the Bear Scotland limitation. In Chief Constable of Northern Ireland Police v Agnew the Northern Irish Court of Appeal found that the three month gap did not break a series of under-payments of wages. Agnew was due to be heard by the Supreme Court but has been stayed. Although only obiter, Lady Justice Simler in the Court of Appeal in Pimlico Plumbers gave a clear steer on the three month gap point stating "My strong provisional view is that Agnew is correct on this point".
The two year backstop - The two year backstop on unlawful deductions from wages claims introduced in 2015 is not relevant when claims are brought under the WTRs.
Finally, it is unlikely that the UK's departure from the European Union will reduce the impact of this case for now. This case was brought well before Brexit, when the UK was a member of the European Union. However, considering the UK has a duty to interpret national law so far as possible in line with the WTD, it would seem unlikely that the WTRs could be interpreted differently. It is uncertain whether the UK government would choose to legislate to change this position, it is also questionable whether this would even be permitted considering the UK's commitment to a level playing field post-Brexit.
We will keep you updated on any news of an appeal.