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Umbrella IT contractors urged to seize on court ruling to reclaim withheld holiday pay

The outcome of a court ruling concerning a holiday pay dispute between Pimlico Plumbers and one of its former employees could have costly implications for the umbrella company sector, it is claimed

IT contractors who have been denied their holiday pay entitlements when working for umbrella companies could be in line for substantial amounts of compensation, in the wake of a court ruling involving a former employee of Pimlico Plumbers.

Gary Smith, who previously served as a heating engineer for Pimlico Plumbers between August 2005 and May 2011, decided to challenge the firm’s view that he worked for the company as a self-employed contractor, rather than an employee, meaning he was not entitled to paid time-off.

Smith was successful in having his status as an employee recognised during an earlier tribunal ruling, which Pimlico Plumbers accepted. However, the company said he would be unable to claim back the holiday pay he missed out on because he had left it too late.

This ruling has since been appealed and escalated to the Court of Appeal, who published its judgement in early February 2022, which confirmed Smith is entitled to make a financial claim against Pimlico Plumbers to cover the cost of the paid leave he was denied during his time at the firm.

“A worker can only lose the right to take leave at the end of the leave year…when the employer can meet the burden of showing it specifically and transparently gave the worker the opportunity to take paid annual leave, encouraged the worker to take paid annual leave and informed the worker that the right would be lost at the end of the leave year,” the court ruling stated.

“If the employer cannot meet that burden, the right does not lapse but carries over and accumulates until termination of the contract, at which point the worker is entitled to a payment in respect of the untaken leave.”

The judgement is being seized on by contracting market stakeholders as a significant development for umbrella company contractors who have routinely fallen victim to the “unethical practice” of being denied their rightful holiday pay entitlements.

The majority of umbrella companies operate an accrued holiday pay model, whereby the contractor accumulates holiday pay over the course of a calendar year, and some umbrella companies take the view that if this money is not claimed by the year end, they are entitled to keep hold of it.

Concerns have been raised about this practice in the past by industry experts, including James Poyser, CEO of contractor-focused accountancy firm InniAccounts, who told Computer Weekly in May 2021 that some umbrella companies withhold holiday pay to keep their businesses a float.

“It is very tempting to do because all the umbrella company has to do is let sleeping dogs lie, because they’re not obliged to pay out any unused holiday pay – they just have to hope the contractor doesn’t remember to request it,” he said. “Because if they don’t request it, and it’s the end of the holiday year, then the umbrella company gets to keep that money.   

“There is also no statutory legislation that tells umbrella companies that they need to notify contractors that they need to take holiday.”

The court’s judgement potentially means IT contractors that have fallen victim to this practice could be entitled to claim back any holiday pay they accrued and were previously denied.

Rebecca Seeley Harris, chair of the employment status forum and co-author of a policy paper on umbrella regulation, said the judgement paves the way for the government to also introduce legislation that would make the problem of withheld holiday pay a thing of the past.

“Technically, this judgment means that any worker – be they self-employed, a gig worker, an umbrella worker – has the entitlement to paid annual leave but the employer has to ensure that they are made aware of this,” she said.

“If they don’t, the worker does not lose the entitlement at the end of the year, and it begins to accumulate. Also, 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.”

Speaking to Computer Weekly in the days after the judgment came to light, Poyser said his contractor whistle-blowing website, OffPayroll.org.uk, has been fielding anonymous tip-offs from umbrella workers who have been denied holiday pay for a while now through its Fairscore service.

As a result, he said umbrella companies that dabble in this practice could be set for a rude and costly awakening in the months to come.

“The numbers involved are huge on this,” he said. “We can see from the analysis we have already done for people who have asked for payslip checks through FairScore that this could be a critical moment for the industry.”

This is particularly as umbrella companies are renowned for operating with “exceptionally slim margins”, he added.

“The unfortunate reality is that many umbrellas won’t have the reserves to fund repaying holiday pay. It’s highly likely we’ll see some companies being pushed into administration as a result,” he warned.

Crawford Temple, CEO of Professional Passport, a company that provides compliance assessment services to umbrella companies, said how costly this ruling ends up being for the umbrella sector depends on how readily the contractor community responds to the ruling.

“It depends on how prolific those contractors are in pursuing their money,” he told Computer Weekly. “Those companies that have retained significant sums of holiday pay will be more exposed than others, particularly where contractors have opted for the accrued holiday pay method of payment.

“This new ruling now sets required standards around this and should ultimately protect those workers, which is good news.”

Seeley Harris also cautioned contractors against getting too carried away with what the ruling means. “It’s important to note that this is case law, so it’s not legislation. Umbrella companies may still choose not to act on it.”

Even so, the Pimlico Plumbers case should, she continued, “ be a firm warning to umbrellas to make their policies very clear to workers, to remind workers of their entitlement, and ensure their procedures to pay holiday pay are ethical”.

Steps for claiming

If not, there is a chance some of the umbrellas dabbling in this behaviour could be subject to costly group claims in the future, warned Dave Chaplin, CEO of compliance consultancy IR35 Shield.

“Umbrellas that have not met the standard required to avoid rollover of holiday pay, and have not paid it out, maybe in considerable difficulty going forward – should those contractors decide to put in a fairly simple claim. Group action lawsuits may be likely,” he said.

For any contractors – working in the field of IT or otherwise – that are mulling over making a claim, there are some key steps they will need to take, Chaplin told Computer Weekly.  

These steps will include resigning as an employee of the umbrella they are seeking to make a claim against.

“If a contractor stays with the umbrella and contests their position while they are still an employee, the umbrella may push back. Resigning will trigger the legal necessity [for the] umbrella to pay out any outstanding holiday pay, as well as triggering the three-month window in which to make a claim,” he said.

If contractors experience any pushback from the umbrella in question, their next port of call should be enlisting the help of the Advisory, Conciliation and Arbitration Service (ACAS), which should provide free help and assistance with their claim.

“It’s only those umbrellas that have had inadvertently or otherwise used processes around holiday pay that do not meet the required standard that will be affected. Many umbrellas just pay the holiday pay out each month, so it won’t be an issue,” Chaplin continued.  

“Umbrellas that run accrual models and have been opaque on process, leading to large sums of money being withheld from contractors, could be facing a very large bill, with very little wiggle room to defend their position.

“No-one is going to have sympathy for them, and rightly so. And if they have had arrangements to pay some of that retained money back to the agency, they are unlikely to be able to get it back.”

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