Getting employment status wrong and the impact on holiday pay?

Getting employment status wrong and the impact on holiday pay

In February, the supreme court ruled in the court of appeal judgement in Pimlico Plumbers v Smith that the right to take annual leave does not necessarily lapse and can carry over and accumulate until the contract ends. Getting employment status wrong and the impact on holiday pay can have an effect on a company financially. In 2018, another Pimlico plumbers v Smith case ruled that he was employed by Pimlico plumbers and had been incorrectly labelled as self-employed rather than an employee by that company. 

Last year the employment appeal tribunal confirmed that Smith had not filed his claim for the backdated holiday quickly enough. However, the court decided that Smith was entitled to be paid up to four weeks of paid leave in respect to every year he had worked for the company, when leave had been taken but not paid. This meant he should have four weeks pay due from every year he has worked for the company. 

Within this ruling, The judge, Lady Justice Simler, said that to discharge these employees right to claim for any unpaid leave, an employer needs to show it has 

  1. Transparently and specifically given workers the chance to take paid annual leave
  2. Encourage the worker to book and take paid annual leave and
  3. Informed the worker that their right to paid annual leave would be lost at the end of the year.

If this is not met, the right to paid annual leave does not get lost, but carries over and accumulates until the end of the contract, then the employee is entitled to a payment due to the untaken leave. 

There is a risk to organisations receiving an influx of claims by workers who received an underpayment of holiday pay, regardless of how long since the employee last took holiday. Claims of this type could be regarding up to four weeks paid leave for every year works, with no limits of how long ago such leave was unpaid as the normal two-year back date does not apply. This can lead to financial burdens on businesses, in this case, Smith was awarded £74,000 of holiday pay from the last six years in his employment. This was the company’s result of getting employment status wrong and the impact on holiday pay. 

There are four key steps employers can take to prevent any future risk of this happening with their employees. There are as follows:

  1. Ensure your contract wording is correct. Review your contracts and make sure the rules in place are clear when carrying over holiday. Include wording to encourage employees to take annual leave. Employers can also include in their contracts details about taking annual leave around festive and holiday seasons. 
  2. Review your current relationships. Business relationships and the way they are used to interact with contractors will often evolve over time. Therefore, businesses should review their workforce and employment status to make sure individuals have been correctly classified and fix any errors. This will ensure employers are aware of any potential claims and issues that may arise. 
  3. Mitigate future risk. The key to getting rid of such burdens, communication, is very important. Employers need to make sure they are communicating with their employees and that their employees understand the policies and rights in regards to paid annual leave. They can also encourage employees to take leave and provide an opportunity to do so. 
  4. Be aware of calculations. Make sure any paid leave has been correctly calculated, especially if workers have had variable hours or pay elements such as overtime or commission that also needs to be calculated. 

Do you need help understanding employee annual leave rights? Contact us at Beagle HR