Happy holidays, or sunstroke and shark-infested waters?

School’s out for summer and the holidays beckon. Normally such a happy time for fun in the sun and some much-needed r ‘n’ r with family and friends. But this year it’s different! Europe may be opening up, and many of us will be double-jabbed, but the rules on where we can travel, to test or not to test, and how to prove our vaccine status are overwhelming and open for change. It is without doubt an unprecedented holiday season of uncertainty. Whilst COVID-19 has caused havoc for holiday plans, arguably the courts have left us equally as confused when it comes to holiday pay. Two key cases were due to be heard in the Supreme Court at the end of June – tantalising us with the prospect of clarity and clear guidelines. But alas, neither went ahead; the parties seeking to postpone pending the possibility of out-of-court settlements. In this blog we examine the position on claims for backdated holiday pay: the rights, the risks and the reality of where we are now.

Outside the scope of this blog is the question of what must be included in correctly calculating holiday pay, such as the sticky issue of voluntary overtime, and what entitlements can be carried over and when. This will be covered in a future blog. The aim instead is to get a grip on the potential for claims for backdated holiday pay: the rights, the risks and the realities.

The rights:

In last month’s Resource we focussed the spotlight on employment status and the importance of correctly classifying staff as employees, workers or self-employed independent contractors (SEICs). We learned that there is a hierarchy of rights associated with each category: employees enjoying the most protective package of employment rights and, at the other end of the spectrum, SEICs having the least protection. In the middle (and the subject of important recent court decisions such as in Uber and Pimlico Plumbers) sit the workers. For the purpose of this blog, we will be looking at the right to claim back-dated holiday pay: the point to bear in mind is that only employees and workers enjoy the right to paid annual leave and the sister-right to claim for unlawful deductions from wages (which may include unpaid holiday pay). SEICs are not so lucky. Which brings us back to the importance of getting the employment status of your staff right, particularly where SEICs are wrongly classified and belong squarely within the worker category. As we will see, denying your staff their rights to paid holiday can have costly consequences. Please note that reference to ‘workers’ in this blog includes those enjoying employee status.

Minimum holiday entitlement:

The main statutory rules on holiday rights are contained in the Working Time Regulations 1988 (WTR), which implement the European Working Time Directive (WTD).

A worker is entitled to 5.6 weeks' statutory annual leave in each leave year. (This is equivalent to 28 days for those who work five days a week). This is made up of:

• · The right under the WTD to a minimum of four weeks' annual leave (20 days for full-time employees) each year - EU Leave.
• · The domestic right to an additional 1.6 weeks' annual leave (8 days for full time employees) each year, which represents the number of public holidays in the UK in a year. (However, there is no need to use these days on public holidays) – UK Leave.
• · A worker cannot be entitled to more than 28 days' statutory leave in a single leave year but further entitlement may be agreed contractually – Contractual Leave.

A part-time worker is entitled to 28 days' holiday reduced pro rata, according to the number of days they work each week. This can still be expressed as 5.6 weeks' leave.

No minimum period of continuous service is required to qualify for statutory annual leave.

The risks:

Denying staff paid annual leave comes with the obvious risk of claims for back-dated holiday pay. Treating your staff as SEICs, rather than workers or employees, can come with the hidden risk of denying them paid annual leave (as we have seen the right to paid annual leave is a perk of being a worker or an employee and is not enjoyed by true SEICs). But, get the categorisation wrong and you may find that you are facing a claim by a de facto worker for significant sums of back-dated holiday pay stretching back many years. Add to that the possibility that many of your staff may have been denied holiday pay because they were miscategorised as SEICs and you may be facing a class action with the potential for hundreds of thousands of pounds worth of compensation being awarded.

Over the past decade the courts have been asked to conjure with this quandary in a flurry of cases on holiday pay. Let’s examine some of the issues that arose and how the cases (and ultimately legislation) sought to deal with the potential of the financial burden on employers balanced against the rights of workers and employees.

Claims for holiday pay:

There are two routes available to claim for unpaid holiday pay:

• Unlawful deduction from wages claims - workers can bring claims under the deduction from wages provisions of the Employment Rights Act 1996 in respect of unpaid statutory holiday pay (Unlawful Deduction Claim); and
• workers can bring a claim under the WTR where there has been a failure to pay them all or part of any holiday pay due under the WTR (WTR Claim).

Time limits:

In 2009 the case of HMRC v Stringer allowed holiday pay under the WTR to be claimed via an unlawful deduction from wages claim. This potentially opened the flood-gates to back-dated holiday pay claims:

• Claims under the WTR require holiday pay claims to be brought within three months of the date when the specific payment in question fell due; by contrast
• under the unlawful deduction provisions of ERA, claims based on a "series of deductions" must be brought within three months of the last in the series of deductions.

Arguably, a worker who had been with the same employer could theoretically claim that their unpaid holiday pay amounted to a series of deductions going back to 1 October 1998, (when the WTR came into force).

There is no provision in the WTR for linking a series of non-payments of holiday pay, so the time limit runs separately for each individual instance of non-payment. For this reason, claims for unpaid holiday pay are often brought as Unlawful Deductions Claims. BUT the ability to bring such claims was severely curtailed by:

• The Deduction from Wages (Limitation) Regulations 2014 came into force on 8 January 2015, and introduced a two-year backstop period for Unlawful Deductions Claims issued on or after 1 July 2015; and
• The EAT's decision in Bear Scotland Ltd v Fulton [2016] held that where more than three months has elapsed between deductions, this breaks the series of deductions and anything before the three-month break can no longer be claimed.

Clearly, this limits the scope for many workers to bring claims for underpaid holiday pay stretching back to previous holiday years. However, this was not the end of the story.

Chief Constable of Northern Ireland v Agnew:

In 2019, the Northern Ireland Court of Appeal held that a series of unlawful deductions from holiday pay would not be interrupted by gaps of more than three months and that ‘a series’ could be constituted by deductions with a sufficient frequency of repetition, but occurring at different time intervals and in different amounts. Each unlawful deduction may be factually linked to its predecessor by the central vice that holiday pay had been wrongly calculated or denied completely.

Smith v Pimlico Plumbers:

Unfortunately for workers, the Northern Ireland Court of Appeal decisions are not binding on the Employment Appeal Tribunal (EAT) in Great Britain, as Mr Smith discovered to his disappointment this year in March this year. You may recall Mr Smith from our previous blog where he took on Pimlico Plumbers to succeed in his battle to establish that Pimlico plumbers are workers and not SEICs, as Charlie Mullins would have them believe. However, the sun came out only briefly for Mr Smith.

Much to Charlie Mullins delight, the EAT declined to follow Agnew in favour of Bear Scotland on the issue of the gap between deductions, although the point was academic as Mr Smith's claim was out of time.

Unfortunately, for lawyers, workers and employers alike, whilst the Supreme Court was due to hear the appeal in Agnew in June this year – this golden opportunity for clarity has faded as the case was removed from the list pending settlement negotiations between the parties. The issue of whether a gap of three months or more between unlawful deductions will break the series for the purpose of back-dated holiday pay claims appears to favour the decision in Bear Scotland v Fulton (as followed in Pimlico Plumbers). But, just as the Northern Ireland Court of appeal is not binding on the EAT, nor is the EAT bound by other EAT decisions. Whilst the Appeal in the Supreme Court in Agnew would have provided much needed guidance on this issue for all concerned, the sun has yet to come out on this holiday pay point and employers should proceed with caution and seek legal advice on this remaining grey area.

Does one instance of correct payment break a series of deductions?

Here’s another grey area to look out for when considering holiday pay, which was not explicitly dealt with in the EAT's judgment in Bear Scotland or Pimlico Plumbers.

When Bear Scotland was first heard in the Employment Tribunal, it was suggested that, as a matter of logic, deductions of a similar type may form a series (using the ordinary meaning of that word) even if the deductions are irregular and are interrupted by instances of correct payment. To use an analogy, odd numbers could be said to form a series, even though they are interrupted by even numbers.

Unfortunately, the EAT did not reach a view on whether an irregular series deductions (with no gaps of more than three months) could amount to a "series of deductions" for the purpose of an Unlawful Deductions Claim or whether any instances of correct payment break a series of deductions.

However, the Northern Ireland Court of Appeal in Chief Constable of Northern Ireland v Agnew dealt with this point decisively. It held that there was nothing in the legislation to suggest that lawful payments of correct amounts between the various holiday payments would interrupt the series. Each unlawful deduction was factually linked to its predecessor by the central vice that holiday pay had been wrongly calculated or denied completely.

As we know, Agnew is not strictly binding in Great Britain and we have been denied the benefit of a decisive (and binding) Supreme Court decision in Agnew due to the case being removed from the Supreme Court list pending settlement negotiations.

For the time being, an employer that wants to protect itself from future claims and minimise the likelihood of any retrospective claims will need to consider conclusively ending, rather than merely interrupting, the series of deductions. This could be achieved by starting to pay holiday pay correctly, and continuing to do so. Workers would need to bring a claim within three months of the last salary payment from which a deduction had been made. Provided the employer does not then start making the unlawful deductions again, any worker who has not brought a claim will be time-barred from doing so (leaving aside any argument for granting an extension of time).

The reality:

That’s not quite the end of the holidays: One final case worth noting on the complex conundrum of holiday pay is King v Sash Window Workshop Ltd [2017]. In this case the European Court of Justice held that workers who have been denied the opportunity to take holiday not only accumulate the leave, but can carry it over for years and are entitled to a payment in lieu on the termination of their employment.

Three points to bear in mind:

• This case focussed on workers who were denied the opportunity of taking any holiday at all; and
• The workers were deemed to have been denied the opportunity to take annual leave because they were wrongly categorised as SEICs, rather than workers, and as such believed that any holiday taken would be unpaid; and
• The claims arose on termination of their contracts, not during the course of their relationship with their employer. Where the relationship was ongoing, the workers would have been able to bring Unlawful Deductions Claims and WTR claims provided they were made within the relevant three-month time limits specified above and subject always to the guidance on breaking a series of deductions as decided in Bear Scotland together with the two-year back-stop under the Deduction from Wages (Limitation) Regulations 2014.

So, to recap, the European Court of Justice held in King v Sash Window Workshop Ltd that a worker is entitled to be paid on termination for any periods of untaken annual leave that have accrued during employment, where the worker has been discouraged from taking that leave because it would have been unpaid. There was no limit on the amount of leave that could be carried over in this type of case because an employer that does not allow workers to take paid leave must bear the consequences.

Obviously, this decision has major consequences for workers wrongly classified as SEICs, potentially giving them the right to many years of unpaid holiday pay for holiday not taken. Effectively, this decision threw into question the two-year back-stop on unlawful deductions claims and the decision in Bear Scotland regarding breaking a series of deductions where there is a gap of three or more months between deductions. In theory, claims on termination for accrued but untaken holiday could go back as far as 1998, when the WTR were introduced!

However, Sash Windows did not deal with workers who have taken holiday but not been paid for it. It also did not directly address the calculation of underpayments in respect of holiday that has been taken, or the limitation rules that apply to such claims.

Smith v Pimlico Plumbers (again):

We have already considered two key points addressed in the March 2021 EAT judgement in this important case:

• The risks of getting the classification of workers wrong and opening up the possibility of backdated claims for holiday pay;
• The unwillingness of the EAT in Pimlico Plumbers to follow the decision in Agnew and instead preferring the decision in Bear Scotland regarding breaking a series of deductions where there is a gap of three-months or more between unlawful deductions.

A third point of appeal raised by Mr Smith was whether the decision in King v Sash Windows, allowing leave to be carried over indefinitely where a worker is deterred from taking leave because it was not paid for by the employer, could also apply to leave taken but unpaid as at the date of termination.

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 a SEIC and as such was not entitled to any 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 argued that he should be entitled to claim holiday pay for those periods of leave as far back as 2005 based on the decision in King v Sash Windows.

Unfortunately for Mr Smith, the EAT held that he was not. Yes, he was a worker. Yes, he had been denied his entitlement to paid annual leave but crucially, he was not entitled to claim holiday pay for those periods of leave which had been taken but unpaid. The EAT made the important distinction between taking leave and not being paid for it, as opposed to a worker who has been denied the opportunity to take leave, because he knew it would be unpaid (as in Mr King’s case). In short, the carry-over rights set out in Sash Windows apply to leave that was not taken as a direct result of the employer’s failure to pay for it. Mr Smith had taken annual leave (albeit unpaid) but this meant he could not argue that he had been denied the opportunity to take that leave and as such there was no right to carry-over.

Conclusion:

The Pimlico Plumbers Case may provide some cause for optimism amongst employers when it comes to claims for backdated holiday pay. But the fact remains that where a worker is wrongly classified as a SEIC there may still be scope on termination for a significant claim for back dated holiday pay, particularly where they have been deterred from taking annual leave due to a belief that they will not be paid for it.

The EAT in Pimlico Plumbers did comment that the decision in Bear Scotland regarding the three month gap on breaking a series of deductions was still good law, and preferable to the Norther Irish Court of Appeal decision case in Agnew. But the decision in Bear Scotland and Pimlico Plumbers are no more binding on future EAT decisions than the decision in Agnew. Sadly, we have lost the benefit of the promised clarity from a Supreme Court decision in Agnew.

So, happy holidays everyone! And remember, it is always advisable to check the forecast and apply the sunscreen before you grab your lilo and head in… holiday pay for workers remains shark-infested waters – please don’t get burned.

Our employment specialists at Burnetts are available to provide clear and commercial advice on this notoriously complex area of the law. You can contact us at hello@burnetts.co.uk and 01228 552222.