The UK  Court of Appeal has given its judgment in the case of Smith v Pimlico Plumbers and has allowed the appeal by the appellant in relation to his claim for holiday pay.  The case considered whether the worker (who had been incorrectly identified as self-employed) was within time to bring his claim for paid annual leave.  The employer had claimed that the worker’s claims were out of time.

Mr Smith worked for Pimlico Plumbers Ltd from 25 August 2005 until 3 May 2011.  Although he was considered to be self-employed he brought a claim in the Employment Tribunal on 1 August 2011 alleging that he was at least a worker who was entitled to paid annual leave.  During the period of his engagement he had taken periods of leave but these had always been unpaid. The Supreme Court in 2018 decided on the preliminary issue that he was a worker and the case was then remitted to the Employment Tribunal to consider the holiday pay claim.  The tribunal rejected the claim on the basis that it was out of time – the last period of unpaid leave taken by the worker was on 4 January 2011.  Payment for that period of leave would have been due on 5 February and therefore he should have submitted his claim by 4 May 2011.   The tribunal rejected the worker’s argument that the decision of the ECJ in King v Sash Window Workshop [2018] ICR 693 (“King”) entitled him to bring, on the termination of his engagement, a claim in respect of all unpaid annual leave accrued throughout his engagement with the respondent, both taken and untaken, which would become payable on termination.

Mr Smith appealed to the EAT.  The EAT held that the tribunal made no error of law in relation to King. King concerned the right to carry over, until termination, annual leave that is not taken because of an employer’s failure to remunerate such leave. It was not concerned with leave that was taken but unpaid. Mr Smiths’ case could be distinguished as he had exercised the right in part by taking the leave.  Mr Smith appealed to the CA.

The Court of Appeal allowed Mr Smith’s appeal.  Although the facts regarding the worker in King were slightly different to the facts of Mr Smiths’ case, the decision of the ECJ was based on principles with a broader reach, which were not limited to those facts. For example, one of the questions was whether it is compatible with EU law, and in particular, with the principle of an effective remedy, for the worker to have to take leave first before establishing whether he is entitled to be paid. That question includes the situation of both a worker who has taken leave for which he has not been paid as well as that of one who has not taken the leave at all.  The ECJ had also emphasised the importance of paid annual leave as a single composite right under Article 7 of the Working Time Directive (WTD). The right to annual leave and to a payment on that account are two aspects of a single right: There are not two distinct legal entitlements, no matter how the domestic regulations are drafted.  The ECJ also pointed out that although the conditions for the exercise and implementation of the right to paid annual leave were recognised as being for member states to lay down, member states should not make the very existence of that right subject to any preconditions. This meant that there should be no precondition that the worker must request annual leave and be refused it.  As a result a worker is entitled to be paid when leave is taken as this enables the worker to have the necessary rest and relaxation .  A worker faced with uncertainty about whether he will be paid for leave when taking it was not regarded as being able fully to benefit from that leave in accordance with Article 7.

 The well-established principle relied on by the ECJ was that the right to paid annual leave cannot be lost unless the worker has had the opportunity to exercise that right before the termination of the employment relationship. The CA held that there is a clear analogy between workers who do not take leave, and those who take unpaid leave, where the employer’s either do not recognise the right to paid leave or refuse to remunerate leave. In both cases, like the worker who is prevented by illness from taking annual leave, they are prevented by reasons beyond their control from exercising the single, composite right.

The CA held that although domestic legislation can provide for the loss of the right at the end of each leave year, to lose it, the worker must actually have had the opportunity to exercise the right conferred by the WTD. A worker can only lose the right to take leave at the end of the leave year when the employer can meet the burden of showing it 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 a payment in respect of the untaken leave, provided that the claim is made within the three months of the date of termination then it will be in time.

The Employment Tribunal  and the EAT were therefore wrong to hold that the principles established in King did not apply to Mr Smith’s pleaded case and also wrong to hold that this claim was outside the relevant time limits.  Since Mr Smith could only lose the right to paid annual leave if he actually had the opportunity to exercise the right to paid annual leave those rights accumulated and crystallised on termination.

While not strictly necessary for it to do so, the Court of Appeal went on to consider the point of whether the “series of deductions” could be broken by a gap of three months or more for the purpose of a claim under section 23 Employment Rights Act 1996 . In general such a claim must be presented before the end of the period of three months beginning with the date of payment of the wages from which the deduction is made. However, where a complaint is made about “a series of deductions”, the three-month period runs from the last deduction in the series.    The Employment Tribunal and EAT had felt bound by the decision in Bear Scotland so that a gap of more than three months between one deduction in a series and the next deduction was sufficient to bring  the series to an end.   However the Northern Ireland Court of Appeal in Chief Constable of the Police Service of Northern Ireland and anor v Agnew and Others had reached an opposing view.  The CA felt that the case of Agnew was to preferred on this point and that the reasoning in Bear Scotland derives no support from the wording in s23(3) ERA.

This is a significant decision where “gig” economy workers have been incorrectly identified.  While those workers could rely on the King decision to carry over any untaken portion of their holiday each year and claim payment for that on termination, they are now, following this decision, able to carry over the taken leave as well.  This only applies to the four weeks leave under Regulation 13 the Working Time Regulations 1998 and not to the additional leave under Regulation 13 A. The claim must still be brought within three months of termination.   A worker only loses the right to paid holiday at the end of the leave year if they had the opportunity to exercise that right, they were encouraged to take it and they were informed that the right would be lost at the end of the leave year if the leave is not taken.

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