Holiday Pay Revisited

One of the hot topics in employment law over the last 10 years has been the issue of holiday pay. The Working Time Regulations 1998 set out an entitlement to paid annual leave for all workers (not just employees) and one would think that would be a relatively simple proposition.

However, the volume of litigation in this area has highlighted just how uncertain and open to interpretation the legal principles are. Many of the rules in this area have been laid down by the courts rather than being clear from the Regulations themselves. So the courts have told us that:

  • Calculating a week’s pay for holiday purposes must include average commission, bonuses, overtime, or any other regularly-paid remuneration relating to the work done under the contract
  • A worker can bring a claim for a series of failures to pay holiday pay at the correct rate, but any series of deductions is broken (and can no longer be claimed) if 3 months passes between underpayments
  • If a worker is unable to use their holiday entitlement in the year in which it accrues due to illness, they must be allowed to carry it forward to the next holiday year, though the entitlement will lapse after 18 months. This applies to the 4 weeks’ statutory leave that is based on the European Working Time Directive
  • A worker cannot be required to take their holidays when off sick, but may choose to do so if they wish

The important case of King v Sash Window Workshop Co considered an individual doing work for a company. He was considered by the company to be “genuinely self employed” and so the company did not pay him for annual leave. As such, he was discouraged from taking annual leave and took very little. This position persisted for some years, and ultimately the individual raised a number of claims against the company. He was held, as a matter of law, to have been a “worker” – workers are entitled to paid annual leave, which had been denied him. An issue arose as to what he was entitled to receive in relation to arrears of holiday pay and the matter was referred to the European Court of Justice (ECJ).

The ECJ held that in these circumstances, where the company had not offered a worker the ability to take paid annual leave, the entitlement to paid leave would carry forward to subsequent years and would do so indefinitely. This decision caused alarm for businesses who use “self-employed contractors” or “consultants” and don’t provide any paid holiday entitlement – if the business is wrong and the individual is in fact a “worker” then liability for arrears of holiday pay could build up over many years, if the worker is discouraged from taking holidays.

The recent decision in Smith v Pimlico Plumbers has widened the scope of this decision. While the King decision related to workers who did not take annual leave at all, the Court of Appeal in Smith held that the same principle applied to workers who did take annual leave but were not paid for it – the right to be remunerated for that annual leave carried forward indefinitely. Lady Justice Simler commented that the right to be paid would only be lost if the company –

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 the employer cannot meet that burden, the right does not lapse but carries over and accumulates until termination of the contract, at which point the worker is entitled to payment.”

This decision is a further warning for employers, and brings into sharp focus the risks of treating individuals who work in the business as being ”genuinely self-employed” and therefore not entitled to any paid annual leave. If it turns out that they have been “mis-labelled” as self-employed when they are in fact workers or even employees, there could be substantial liability building up in terms of entitlement to paid annual leave. That applies whether the leave was untaken (as per King) or taken but unpaid (as per Smith). It is vitally important that employers review their relationship with consultants and self-employed contractors and assess the risks that these individuals are actually workers and have the right to paid annual leave.

This update contains general information only and does not constitute legal or other professional advice.

Please contact our Employment Team should you require assistance in relation to any of the matters discussed.

Douglas Strang, Senior Associate: dst@bto.co.uk / 0141 221 8012

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