Holiday pay: a timely overview for contractors

In the wake of high profile cases like Uber, Deliveroo and Pimlico Plumbers, which saw ‘self-employed’ individuals being classed as ‘workers,’ the spotlight on workers’ rights -- such as holiday pay -- is more glaring than ever, writes Maggie Lawson, head of finance at ICS Accounting.

Before we explore eligibility to receiving this potentially important pay right, keep in mind that individuals working in the UK normally fall into three main categories:

  • An ‘employee’ (which includes those paid via an umbrella company), is an individual who has full employment rights and obligations.
  • A ‘worker,’ is an individual who has limited rights, although these include holiday pay.
  • A ‘self-employed’ person, is an individual such as a sole trader, freelancer or independent contractor, in business on their own account.

What has changed surrounding holiday rights?

This time last year Matthew Taylor’s ‘Good Work’ report was published. The report set out recommendations to update employment law in order to reflect modern working world.  Some of the key areas of the report were employment status, agency and zero-hour workers, statutory leave and holiday pay.

Fast forward a few months and there was a landmark case -- King v The Sash Window Workshop Ltd. In the case King, a window salesman, was engaged supposedly as a self-employed individual. After The Sash Window Workshop Ltd terminated King’s contract, he claimed to be a ‘worker’ and successfully claimed 13 years’ worth of holiday that he wasn’t allowed to take.

The judgment, by the Court of Justice of the European Union (CJEU), means that a worker (even if the employer incorrectly believes that they are self-employed), must be allowed to accrue paid annual leave rights until termination of the arrangement between worker and engager. This right can go back to when the European Working Time Directive was introduced in 1996.

There was a further tribunal case in December whereby Wooller, a locum pharmacist, won her case against Paydens, her previous employer.  In the case, Wooller challenged her employment status and in winning the case was able to claim unpaid holiday for the three years that she worked there.

What does this mean for sole traders, freelancers and the self-employed?

Where there can be no dispute that they are self-employed, then there will be no impact on the individual or the entity engaging that individual. There would be no right to any holiday entitlement and pay.

If the individual is being incorrectly treated as ‘self-employed’ and they are in fact a ‘worker,’ then they may be able to bring a case against the employer. Any review of the case would focus on the usual factors starting with whether the contract truly reflects the working practices of the engagement. 

The following areas would be considered in order to decide an individual’s status:

  • If there is Mutuality of Obligation between the parties. ‘MOO’ looks at whether the engager has an obligation to provide work to the individual and equally whether the said-individual has an obligation to accept the offered work. ­If there is no mutuality, this will generally be fatal to any suggestion of an employment relationship.
  • The ability of the individual to send a substitute to carry out the work or use a sub-contractor. If the individual can send a substitute or utilise the services of a contractor, then it is a likely indicator that the individual is an independent contractor as the contract is not one of personal service.
  • The level of control the engager has over the individual. This looks at whether the business controls how, when and where the individual performs the work. Whether the engager provides equipment, training and premises to do the job. The higher the level of control, the higher the risk they would be deemed to be a ‘worker.’
  • Whether the individual is part and parcel of the engager’s organisation. This looks at whether they are fully integrated into the employer’s workforce such as using the staff canteen or being given a parking space. The greater the degree of integration, the more likely the relationship is deemed to be that of employer/employee.
  • The financial risk of the individual. This looks at whether the individual is genuinely running a business of their own account. For example, if a customer doesn’t pay, then a bona fide sole trader would have to take the financial hit of not being paid.
  • Whether the engager has stipulated exclusivity. If an individual is permitted to work for more than one business it is indicative that they are ‘self-employed’ rather than an ‘employee’ or a ‘worker.’ Employees or workers wouldn’t normally be allowed to work for other entities in the same line of business.

If you believe that you are a worker being incorrectly treated as self-employed, then you may be able to bring a claim for holiday leave; this could be where you took unpaid leave or were refused annual leave. 

What does this mean for those already being treated as workers?

If you are already being treated as a worker by your employer, then you have a statutory entitlement to 5.6 weeks' paid leave a year. In respect of holiday pay, this is the same as if you were an employee.

A week’s pay is worked out according to the kind of hours someone works and how they’re paid for the hours. This includes full-time, part-time and casual workers.

Working Pattern Pay
Fixed hours and fixed pay A week’s holiday pay equals how much a worker gets for a week’s work
Shift work with fixed hours A week’s holiday pay equals the average number of weekly fixed hours a worker worked in the previous 12 weeks at their average hourly rate
No fixed hours A week’s holiday pay is the average pay a worker got over the previous 12 weeks (in which they were paid)

To calculate average hourly rate, only the hours worked and how much was paid for them should be counted. Take the average rate over the last 12 weeks. If no pay was paid in any week, count back a further week, so that the rate is based on 12 weeks in which pay was paid.

If you believe you are not receiving the appropriate rights as a worker or employee, you should contact ACAS.

What is the impact on Personal Service Companies?

Holiday pay is not tax-efficient for the typical one-person limited company – or Personal Service Company. So for a sole director shareholder (or spouse as an additional director and/or shareholder), company holiday pay is not something that is normally considered. 

Generally, directors will pay themselves an annual salary equivalent to the National Insurance primary threshold, which ensures the individual receives their ‘NIC Stamp’ for that tax year.  There is no requirement for directors to pay themselves holiday pay.

For a business with unconnected employees, they will need to ensure that employees receive the appropriate holiday entitlement and pay. This is calculated on the same basis for two workers (as detailed above).

What does it mean for businesses engaging sole traders, freelancers and the self-employed?

The recent changes could prove highly relevant for businesses who engage with sole traders, freelancers and self-employed individuals. Where this is how the business relationship is established, then the individuals will not receive or be paid for annual leave. If there is a risk that the individuals could be classed as ‘workers,’ then they could bring a claim for holiday pay covering the entire length of engagement on termination.

To mitigate any potential claims for backdated holiday claims, the engaging entity needs to ensure that there is no risk the individual could be classed as a ‘worker.’ The best way for engagers do this is to take appropriate professional advice in respect of the contracts, and ensure they truly reflect the business relationship and working practices.

The Future

Given time, such guidance for engagers and anybody else affected by entitlement to paid leave might become second nature, because “promoting awareness” of holiday pay entitlements’ is one of Taylor’s recommendations which the government has agreed to implement.

Holiday pay reaching more people than ever, thanks to Taylor also recommending (and the government accepting) that it should be one of the ‘basic set of core rights’ for all workers, including those in the ‘gig economy,’ could really see the right come into its own.

But all this won’t happen fast. The government has given no specifics in terms of an implementation timetable for Taylor’s recommendations. And the fact that his report was published a year ago but one of the consultations was still running as recently as last month gives a sense of the considerable time it may take for holiday pay changes to be put in place.

Once a timetable does emerge all individuals would be wise to get clued up however -- and fast, because much of what Taylor recommended was well-received (especially his ‘Increasing Transparency’ proposals), and so is unlikely to be delayed or diluted.

Friday 6th Jul 2018
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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