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Pimlico Plumbers loses holiday pay case - key takeaways for employers

In the latest holiday pay ruling to throw a spanner in the works for employers, the Court of Appeal has ruled that a misclassified worker who took unpaid annual holiday could carry over his paid holiday rights from one year to the next and claim compensation in lieu on the termination of his engagement (Pimlico Plumbers Limited and another v Smith).

This puts employers with contingent workers, in the gig economy or otherwise, at increased risk of holiday back-pay claims and significant termination pay liability, so here are some key takeaways and suggestions to help mitigate your risk exposure. 

  • Review your contractor arrangements: Firstly, your risk exposure relates to the paid holiday rights of any workers, so identifying your workers correctly is key.  If you engage self-employed contractors who don’t receive holiday pay, assess whether they could legally be workers, having regard to the working relationship in practice rather than just the documentation, and keep this under review.  The case rulings on worker status are fact-sensitive but according to the Supreme Court’s guidance in Uber v Aslam (2021), the more control that you exercise over someone, the more likely they are to be a worker.  It is no defence that you honestly believe someone is self-employed if legally they aren’t.
  • Identify risk exposure: Quantify your historic holiday pay liability for your worker population.  If, based on your belief that they aren’t a worker, you have denied them paid holiday or they have taken it on an unpaid basis, this ruling and the 2018 ECJ ruling (King v Sash Window Workshop) allows them to carry over their right to four weeks’ holiday (the EU law-derived portion) without limitation from year to year.  This will crystallise as a lump-sum entitlement on termination, which they can pursue as a Tribunal claim within three months thereafter, and the two-year backstop limit won’t apply if they present it as an unlawful deductions claim.  This means that a worker who has been with you for ten years, whose worker status has been overlooked or disputed, is already in line for a 40-week holiday pay windfall on the termination of their engagement.
  • Consider mitigating factors: When quantifying your liability, you can disregard the extra 1.6 weeks’ holiday entitlement provided under the UK Working Time Regulations 1998 (WTR), as the ruling is confined to the four-week entitlement.  In addition, a week’s holiday pay for this purpose (as calculated under the Employment Rights Act 1996) is a worker’s pay for their normal working hours (usually averaged over 52 weeks), effectively limiting your liability for those with part-time hours, though these could be complex calculations.  You can also disregard former contractors whose arrangements terminated over three months ago, as their claims should now be time-barred.
  • Manage future risk: One approach is to regularise the position with workers and to provide them with paid holiday going forward.  This won’t extinguish past liability but it could avert litigation (from workers who actually want to take their holiday) and will reduce future liabilities on termination.  To prevent the carry-over of holiday, make it clear in their contract or in a contractual policy that they have the opportunity to take paid holiday, are encouraged to do so and that they will lose any untaken holiday at the end of the holiday year.  You also have options under the WTR to specify when holiday is taken.  However, offering rolled up holiday pay (enhancing pay to cover holiday pay) is legally risky and not a solution, and the Court of Appeal has confirmed that not paying for holiday when it is taken could deter a worker from taking it or from enjoying it to the full. 
  • Use the “three-month rule” with caution: If you aren’t calculating holiday pay correctly in reliance on the “three-month rule”, revisit this going forward.  The rule (endorsed in the 2015 Bear Scotland case) is that a gap of more than three months between deductions breaks a “series of deductions”, preventing unlawful deductions from wages claims based on a series of holiday underpayments from being brought.  The Court of Appeal in this Pimlico Plumbers ruling has unhelpfully cast doubt on the validity of this rule and while its opinion is not binding on other courts or tribunals, it is likely to be highly persuasive in future cases.  Check that your calculation approaches are compliant, particularly in relation to variable pay elements such as overtime and commission, to mitigate the risks. 
  • Consider risks on M&A: If you are a buyer, use due diligence, warranties and indemnities to identify and protect yourself against potential holiday pay liabilities, whether in relation to misclassified contractors or other workers.
  • Be proactive: There is never a quiet time in the world of holiday pay case law, and with the wave of worker status claims, this ruling paves the way for more litigation to come.  Being proactive and adopting systems to recognise your workers and to deal with their holiday (and other) rights will help you to avert litigation, keeping your best foot forward.  If you choose not to regularise your position with workers as outlined above, it is important to do this consciously, recognising the attendant legal, financial and reputational risks.

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