Backdated Paid Annual Leave (UK Employment Law – 30 May 2022)
Many businesses who take on people on a self-employed, consultant or other capacity to avoid employer liabilities, live in fear of backdated holiday pay claims.
Under the Working Time Regulations 1998, workers are entitled to paid holiday of 5.6 weeks per year (28 days per annum (including bank holidays) for someone working 5 days a week).
A ‘worker’ includes individuals providing work or services personally, unless doing so under a profession or business undertaking (ie in business on their own account)
If a worker gets Worker status recognised, are they then free to claim unlimited backdated holiday pay and annual leave? The short answer is still:- Still Tricky.
The Working Time Regulations state that the right to paid holiday has to be exercised in the particular holiday year, and cannot be carried over (though exceptions apply for pregnancy and long term sickness). The right to a payment in lieu of holiday accrued but untaken only crystallises on termination.
The government introduced the Deductions from Wages (Limitation) Regulations 2014 which limited claims for backdated holiday pay to two years before the date the claim was lodged.
In 2018 though, in King v Sash Window Workshop the European Court of Justice said that Workers should not be prevented from carrying over and accumulating paid annual leave rights until termination, if the employer refused to pay for that annual leave. This decision therefore called into doubt the 2014 regulations.
Fast forward to 2022 and the Court of Appeal decision in Smith v Pimlico Plumbers Ltd (https://www.judiciary.uk/wp-content/uploads/2022/02/Smith-v-Pimlico-Ltd-judgment.pdf) which held that a worker can to carry over a right to payment for annual leave from one annual leave year to the next, if the worker had been permitted to take annual leave but had not been paid for it. The use-it-or-lose it principle only applied if the employer had given the worker the opportunity to take paid holiday in the first place.
A worker will only lose the right when the employer can show it gave the worker the:
a) opportunity to take paid annual leave,
b) encouraged the worker to take paid annual leave and
c) informed the worker that the right would be lost at the end of the leave year. Otherwise the right to paid holiday rolls over and accumulates.
As an aside the Court of Appeal hinted strongly backdated claims were not timed out if there was a gap of more than three months between each occasion the employer failed to pay holiday pay (see the earlier Bear Scotland EAT decision)
The Smith decision encourages workers to claim backdated holiday pay, but the right to payment in lieu would still only crystalise on termination, and the 2014 regulations limiting claims to 2 years still appear to apply.
Where workers’ pay varies, then each time they take holiday, there is the additional challenge of calculating the daily rate for each period of leave taken.
So when workers are able to bring backdated holiday pay claims, employers are still able to fight a rear-guard action to limit them.