Staff employment status & holiday pay
Does your business have long term staff who are considered ‘self-employed’? You may be exposed to lucrative back-dated holiday pay claims. Here’s what you can do.
If your company engages with self-employed contractors regularly, those individuals may be able to establish themselves as employees rather than self-employed contractors and workers. This will grant them an archive of legal rights, which consequently, may leave your company in a vulnerable position. Many businesses have a legitimate concern about this, especially with recent case law developments.
If employees are incorrectly classified or there is a doubt of their employment status, your company could face years of back-dated holiday pay claims.
This is exactly what happened in the landmark decision in the Court of Appeal (CoA) in the case of Smith v Pimlico Plumbers. Mr Smith had worked for Pimlico Plumbers for five years and was never paid for his vacation time, even though he was authorised and allowed to take it. The ruling ensured that Mr Smith was entitled to back pay for the four weeks of annual leave accumulated each year during the term of his employment (totalling 20 weeks), which the EU Working Time Directive mandates.
Legislation dictates that all employees are entitled to 5.6 weeks’ holiday entitlement per annum under the Working Time Regulations 1998. The Court of Appeal, in this case, set a rule that has allowed employees to carry over four weeks of EU paid leave per year that they took but were not paid for because they were not classified as an employee. When a worker goes on vacation but isn’t paid, or is underpaid, they acquire the right to file an unlawful deduction of wages claim, and if there are multiple instances, they can file a series of deductions claim.
Despite these preliminary considerations, this ruling only applies to the four-week EU Working Time Directive. It has no bearing on the 1.6 weeks of paid leave that remain. Employees will only be allowed to carry over this allowance if company policy permits it. Otherwise, if this portion of the holiday allowance is not taken, it will be lost.
All workers must be given the correct employment status. When determining whether a worker is self-employed or an employee, it is important to consider the following:
The worker is likely to be an employee if they’re:
- Told what work to do and set a deadline;
- Told how to carry out their role;
- Regularly set hours;
- Regularly paid (Weekly, Monthly);
- Unable to send a replacement worker to carry out the task set;
- Given the equipment or tools required to carry out their role; and
- Told where to work
If several of the above are present, they will likely be found to be an employee. This will give the workers more legal rights.
Even if the above criteria are spelt out in writing, the reality must reflect this. The workers in the case of Autoclenz Ltd v Belcher signed a contract that stated that the claimants were under no obligation to perform any task, that they could arrange for a substitute worker to perform their duties, and that they were responsible for providing their own materials and uniforms. They would be classified as ‘self-employed’ based on the criteria outlined above. This, however, was not the case. The written contract did not reflect the reality of the contract and relationship, according to the Court of Appeal. This was confirmed by the Supreme Court, which ruled that the claimants, in this case, were in fact employees, despite the written contract which suggests the contrary.
How can you keep your company safe?
If this is the case, your business must follow the correct holiday procedure. The company must actively:
- Promote the opportunity to take paid annual leave;
- Encourage the employee to take it; and
- Notify the worker that if it is not taken, it would be lost at the end of the holiday year.
If the employer fails to do this, it allows the employee to carry over the untaken holiday and accumulate it until termination. This could lead to a large claim of backdated holiday pay. This is confirmed in the CoA ruling in Smith v Pimlico Plumbers 2022.
What are the wider implications?
The ruling in Smith v Pimlico Plumbers was not the first to place this concern on employers. Case law seems to be placing a greater emphasis on the employers to promote and encourage workers to take paid holidays.
The case of King v Sash Window Workshop Ltd illustrates the failure to do this. Here, the claimant had never been offered paid holiday, nor did he ever assert his right to paid holiday. Consequently, the claimant was able to recover payment of untaken accrued holiday, backdating 13 years of holiday entitlement throughout his employment: a claim of approximately £27,000. This case was used in the judgment in Smith v Pimlico Plumbers.
The principle set down by the Employment Appeal Tribunal (EAT) Bear Scotland set out that a gap of more than three months between deductions prevented the deductions from forming a series of deductions. The case of Smith v Pimlico Plumbers (2) ignored this as they are not bound to EAT decisions. Instead, Mr Smith was able to bring a claim for backdated holiday pay in the CoA and win in the Supreme Court. This has set a new precedent that employers must be cautious of.
Case law in your favour?
Although there appears to be a general trend against employers, this is not always the case. Stojsavljevic and others v. DPD Group UK Ltd and Johnson v. Transopco Ltd defied the trend and ruled in favour of the employer.
The employer in Stojsavljevic and others v. DPD Group UK Ltd limited the ability to send substitute workers (a key metric to ascertain the employment status of a worker). These requirements included having a valid driver’s licence, being aware of the company’s policies, and working for at least 90 days. The claimant claimed that this limited his ability to provide a substitute, but the Employment Tribunal determined that the requirements were genuine and reasonable. The Employment Appeal Tribunal agreed, concluding that the claimants were self-employed.
The claimant in Johnson v. Transopco Ltd was a black-cab driver who used the ‘Mytaxi app’ to find clients for transportation around London. As a self-employed taxi driver, he also continued to source passengers through other means, so this only made up a small portion of his overall income. The ET determined that the respondent was a client, not an employer, due to their lack of control over the claimant’s work. This decision was upheld by the EAT.
There appears to be a general trend against employers, although there are examples of cases that suggest the contrary. This article has two important takeaways for you, as an employer, to consider. To begin, correctly classifying employees is critical to avoid years of unpaid vacation claims. The initial process of extra due diligence may save you thousands in the future. Second, a paid vacation should be promoted and encouraged proactively to ensure correct compliance.
For any Employment-related queries, please do not hesitate to get in touch with our experienced employment department at Sterling Law. We look forward to hearing from you.
Contact Anton and Inna:
0207 822 8535