Entitlement to paid annual leave: The case of Smith v Pimlico Plumbers Limited

In the recent case of Smith v Pimlico Plumbers Limited, the Court of Appeal held that a worker is entitled to compensation for leave that has been taken but not paid. Roger Spence from our employment law team looks at the case and the implications for employers.

Case background

Under Art. 7(1) of the Working Time Directive, employees have a right to take annual leave and receive remuneration for this. In Smith v Pimlico Plumbers Limited, the Court of Appeal considered the question of whether a worker is entitled to receive remuneration under Art. 7(1) for unpaid holiday taken during the course of their employment.

The claimant concerned had previously been incorrectly considered as a self-employed contractor and denied paid annual leave on this basis. Having previously succeeded in demonstrating that he was a worker for the purposes of the Working Time Regulations, he sought to claim for the unpaid holiday pay accrued during his six years of employment.

Judgment

In reaching its judgment, the Court of Appeal considered the widely reported case of King v Sash Window Workshop Ltd, which held that, where an employer has told the worker that leave will be unpaid and the worker is thus deterred from taking leave, workers have a right to carry over and accumulate four weeks’ of untaken leave each year, and receive compensation for this upon contract termination. In Smith v Pimlico Plumbers Limited the Court found that this right extended to workers who had actually taken leave but not been paid for it because, as put by Lady Justice Simler, “if a worker takes unpaid leave when the employer disputes the right and refuses to pay leave, the worker is not exercising the right”. In summary, the Court of Appeal therefore ruled that a worker who has taken unpaid leave has a right to receive compensation for this from their employer.

The Court further clarified that a worker can only lose the right to claim paid annual leave if their employer can demonstrate at the end of the leave year that they:

1. a) Specifically and transparently gave the worker the opportunity to take paid annual leave;
2. b) Encouraged the worker to take paid annual leave; and
3. c) Told the worker that this right would be lost at the end of the leave year.

If an employer cannot prove that they have met this burden, the employee’s right to paid leave is carried over and accumulates until the termination of their contract of employment.

Implications for employers

This judgment is of particular significance to businesses who regularly contract those in the gig economy and umbrella workers, as they may erroneously consider such individuals to be self-employed and thus deny them paid annual leave. Given that workers have a right to remuneration for up to four weeks’ untaken leave each year upon employment termination, the financial costs of incorrect classification of employment status and accompanying unpaid leave can be considerable. This is especially true if the course of employment dates back for several years. For employers, this underscores the importance of ensuring that employee status is categorised correctly and that the correct procedure for providing holiday pay is followed. As such, employers should regularly reflect on the relationships they have with contractors and consider the steps which they must take to discharge the burden set out by the Court of Appeal.

If you would like advice to help your business consider the status of contracted individuals and to demonstrate that workers have been encouraged to take annual leave, please contact Harrison Drury’s employment law team on 01772 258321.