Court of Appeal ruling offers hope for UK umbrella firm workers chasing holiday pay

Plumber's right did not lapse 'but carried over and accumulated until termination of the contract'

A former worker for Pimlico Plumbers has won a case in the Court of Appeal over the right for backdated holiday pay in a case set to help employees of umbrella companies in all sectors, including information technology.

Gary Smith won the right to have paid holiday backdated following a ruling from the Civil Division of the Court of Appeal, which found that as an employee he had the right to paid leave and that right could be carried over.

Working for Pimlico Plumbers from August 2005 until May 2011, Smith had previously taken the company to court over his employment rights. An earlier ruling had concluded he was an employee and entitled to holiday pay.

Although Pimlico Plumbers accepts he was entitled to paid annual leave, it argued that Smith acted too late to enforce his rights.

The company failed to convince the court. The ruling said Smith's "right did not… lapse but carried over and accumulated until termination of the contract, at which point Mr Smith was and remains entitled to a payment in respect of the unpaid leave."

The case has implications for all workers hired by umbrella companies including those in the tech sector. Campaigners have argued that regulation of these middle-men employers is weak and they have found evidence of workers being left without holiday pay and charged with hidden fees.

Rebecca Seeley Harris, chair of the Employment Status Forum and former advisor to the Office of Tax Simplification, said: "Today's judgment is perhaps one of the most significant I have seen for a long time when it comes to protecting workers' rights, specifically for the entitlement to paid annual leave.

"Technically, this judgment means that any worker – be they self-employed, a gig worker or an umbrella worker – has the entitlement to paid annual leave but that the employer has to ensure that they are made aware of this. If they don't, the worker does not lose the entitlement at the end of the year, it begins to accumulate. It is likely that anyone who has recently finished a contract could make a claim, within three months of the end date, if they think they have been short-changed."

James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, said the case could act as a wake-up call. "Withholding holiday pay is unethical. There are no legal grounds for it to persist. Umbrellas that rely on holiday pay to keep their businesses afloat must urgently address the issue. It's possible some will go out of business as a result."

What is IR35?

IR35 is a reform unveiled in 1999 by the UK tax authorities. The latest regulation change – which came into force in April 2021 – forces medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.

Contractors found to be within the scope of the legislation – i.e. inside IR35 – will have to pay more tax than they might expect.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.

Poyser and Seeley Harris led a campaign to see greater regulation of umbrella companies and proposed changes – backed by prominent MPs – to the UK's 2021 Finance Bill to clamp down on intermediary employment firms, which campaigners say have mushroomed as temp agencies and end-user businesses avoid directly hiring contractors judged to fall within the IR35 "off-payroll working" tax law. The move failed.

They have argued that government proposals to police umbrella companies using a single enforcement body left unanswered questions.

Seeley Harris said yesterday's Pimlico Plumbers ruling made the need for regulation of umbrella companies more likely. "The most important aspect of today's judgment is that it paves the way for the government to legislate on this issue."

In a statement sent to The Reg, Dave Chaplin, CEO of tax compliance firm IR35 Shield, said the case "highlights the dangers for firms of hiring people on a false-self-employed basis".

He added: "Some umbrella firms have been accused of using opaque practices to pocket unclaimed holiday pay and use the "use it or lose it" excuse to refuse to pay it out. That may no longer work, and umbrellas that have not met the standard required to avoid rollover of holiday pay, and have not paid it out, may be in considerable difficulty going forward - should those contractors decide to put in a fairly simple claim. Group action lawsuits may be likely."®