In a long-running case, heating engineer Gary Smith, made waves within the industry by claiming he was owed a shocking £74,000 in an accumulation of unpaid holiday pay.
Gary Smith worked for Pimlico Plumbers between 2005 and 2011 as an independent contractor and, as a contractor, he was unable to access basic workers’ rights such as holiday pay. During this time, Mr Smith continued to take a number of days unpaid leave and upon termination of his contract, filed an employment status and holiday pay claim.
In 2018, the initial Employment Tribunal found that Mr Smith had been engaged as a worker, not a contractor, backing up his position to basic employment rights. Pimlico Plumbers appealed this decision in the Court of Appeal, which subsequently supported the lower courts judgement and lead Pimlico Plumbers to appeal the decision to the highest court. The Supreme Court would later uphold the initial Employment Tribunal ruling that Mr Smith was in fact a ‘Worker’.
With Mr Smith’s ‘Worker’ status confirmed, his legal team were looking to rely on a principle found in ‘King vs. Sash Windows Workshop,’ which found Mr King had avoided taking leave at the risk of being unpaid when in fact – as identified in his employment status claim – he was entitled to paid leave.
Nevertheless, the Employment Tribunal in Smith vs. Pimlico Plumbers dismissed the claim on the basis that it was brought out of time since Mr Smith took unpaid leave.
Mr Smith subsequently appealed this decision, and the Employment Appeal Tribunal (EAT) were asked to consider whether or not holiday pay can be carried over indefinitely if the worker has taken unpaid leave during their engagement. The EAT upheld the lower courts earlier decision that Mr Smith’s claim was brought out of time.
In a major development in this case, a recent Court of Appeal ruling has found that the right to paid annual leave is a “single composite right” and therefore his claim could not have been brought out of time. Domestic legislation does limit the carrying over of holiday entitlement but only if the ‘worker’ exercises that right before the contract is terminated - which in Mr Smith’s case, was not applicable.
Businesses - especially those engaging with temporary workers - should be conscious of the fact that many self-employed contractors could argue that they have been miscategorised. It is important to note, the tests for employment status and tax status are regrettably different; below we focus on the employment status test.
To safeguard your business from this potential risk, you should focus on the three principal areas of employment status case law: Personal service (substitution), control and mutuality of obligation (MOO). Being able to substitute another to do your work is a strong indicator of being self-employed. For example, someone who is employed directly would be expected to provide their personal service under a contract of service, whereas a self-employed contractor works to provide services in a one-off project.
Control is seen as dictating the work that someone carries out and how they go about completing it. When an individual is self-employed there should be a lack of control over the work they complete. A self-employed contractor will have control over how and when the work is performed, whilst supplying the primary tools required to carry out the work, providing there are no financial limitations to providing that equipment themselves.
MOO is one of the foundations governing employment status which allows tribunals to determine if an individual is eligible to employment rights. The test for MOO has two key elements that must be present: an employer being obliged to offer work to an individual, and the individual being obliged to accept and complete the work offered. If these two elements are present, then there is a contract of service. The client who the self-employed contractor is providing services to would not be obliged to provide them with further work as there is no MOO.
Reasonable care can be achieved when categorising workers by ensuring you can evidence the conditions in the working environment, drawing inference from the ‘purposive’ approach established in Autoclenz and further extended in the recent Uber Supreme Court ruling. Furthermore, you can strengthen your position by committing to regular monitoring and auditing.
Businesses should be monitoring and encouraging employees to take annual leave within the correct timeframes. You should also be issuing regular reminders to individuals who are yet to take annual leave and informing them of the appropriate guidelines surrounding any unused holiday pay. Without doing so, employees are within their rights to recover holiday pay funds back to the start date of their employment, which could amount to thousands of pounds in liability for your business.
It is important to be aware that the King Vs Sash principle only applies to the four weeks paid holiday entitlement granted under the European Working Time Directive (EWTD). It remains to be seen if this principle would also apply to the additional 1.6 weeks holiday provided to UK workers under the Working Time Regulations (WTR).
The contract will specify how long the notice period is, providing a worker serves their employer with a notice of termination. A worker is entitled to be paid for any unused annual holiday entitlement up until date of termination of their employment contract. This applies whether the employee has worked any notice or been paid in lieu of notice. Some businesses may have incorrectly profited from unused holiday pay, many businesses may now have unknown liabilities to repay should their termination processes have been inadequate or not in line with the judgement in this tribunal.
Any businesses that place temporary workers should also ensure each worker is provided with a Key Information Document (KID) to outline essential and notable information associated with their assignment. By explaining how they will be engaged, you can ensure full transparency before contractors agree to any contractual terms, demonstrating compliance within the supply chain.
Wider Due Diligence
HMRC and policy setters now place a much greater focus on supply chains as a whole and have recently published extensive guidance for Businesses. Guidance now suggests companies follow the simple supply chain due diligence principles of ‘check, act, review’ to help assure credibility and legitimacy of their suppliers.
In 2018, the government published the Good Work Plan, which aims to protect workers’ rights and create a level playing field for businesses following the law. In June 2021, the department for Business, Energy, and Industrial Strategy (BEIS) announced its intentions to create a Single Enforcement Body (SEB) to focus on tackling non-compliance within the industry. The SEB will be responsible for combatting issues surrounding national minimum wage (NMW), modern slavery, holiday pay and statutory sick pay (SSP) along with having a whistleblowing helpline for workers to report any non-complaint or unscrupulous providers operating within the sector.
Regarding due diligence, Baker McKenzie Employment Partner, Stephen Ratcliffe wrote: “With the combination of this case [Pimlico Plumbers] and the proposed focus of the government’s Single Enforcement Body on holiday pay compliance, employers really need to focus on how they calculate holiday pay now, or else face what may be enormous holiday pay liabilities going back very many years.”
Read more around what you should be doing as a business to minimise your risks here.
As of 31 January 2022, Lord Hendy QC’s Status of Workers Bill is entering its third reading in the House of Commons and if successful, will see a simplification of how workers are categorised. As it sits, there are a range of categories, each holding different employment rights, making it difficult for employers to distinguish where an employee sits in terms of employment status and what rights they are entitled to. If the bill were to become law, it shall “create a level playing field for organisations who felt they were being undercut by competitors that denied workers their rights” and would” diminish the area for such litigation and give workers more clarity around what they’re entitled to” (Personnel Today).
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