Umbrella IT contractors could get back-dated holiday pay windfall following Supreme Court ruling

IT contractors that provide their services through umbrella companies could be in line to receive a sizeable holiday pay-related windfall, in the wake of a Supreme Court ruling that states part-year workers should be entitled to the same rate of holiday pay as those who work all year round.

The ruling means that anyone who is employed continuously but may only work part of the year, which would include IT contractors who provide their services to end-clients via umbrella companies, is entitled to 5.6 weeks of holiday pay, paid out to them at their weekly rate.

As stated in the Supreme Court’s ruling: “The amount of leave to which a part-year worker under a permanent contract is entitled is therefore not required to be, and under domestic law should not be, pro-rated to be proportional to that of a full-time worker.”

And this ruling could have big financial implications for umbrella companies because it leaves the door open for contractors to make backdated holiday pay claims and claw back any holiday pay money they may have missed out on previously.

“It doesn’t matter if you are a cricket coach working the summer, a chef at a school on a zero-hours contract, a nurse delivering care in the community or an IT worker employed via an umbrella – you are entitled to 5.6 weeks of holiday paid at your weekly rate. Pro-rating is now undeniably redundant,” said Rebecca Seeley Harris, chair of the employment status forum and co-author of a policy paper on umbrella regulation.

“[The court’s ruling] will have extraordinary repercussions for permanent, casual and zero-hour contract workers. Unless the government steps in very quickly to legislate, backdated holiday pay is now something workers in these situations are genuinely entitled to.”  

That said, any IT contractors looking to seize on this ruling should be mindful that while the conclusions of the Supreme Court are legally binding, they have no automatic right to make a backdated holiday claim just yet.

“Until the government decides to legislate, there is not automatic right, but this is a decision of the Supreme Court so it would be unwise for any organisation to ignore it,” added Seeley Harris.

“Umbrella companies may still choose not to act on it, however, [this ruling] should be a firm warning to umbrellas to make their policies very clear to workers, [and to] remind workers of their entitlement and to ensure their procedures to pay holiday pay are ethical.”

Dave Chaplin, CEO of tax compliance firm IR35 Shield, backed this view and said umbrella companies need to take stock and adjust how they operate to ensure their operations align with the ruling.

“This is a curious anomaly in the law, whereby a worker who has not earnt the full entitlement to 5.6 weeks holiday pay could still have it owed to them, simply by working full-time for 12 weeks. For temporary workers on zero-hours contracts, agency payroll or [working] via umbrella companies, it begs the question: where is this money going to come from?”

The financial burden the ruling could put on umbrella companies may lead to some sliding into administration, given the very thin margins umbrella companies are renowned to operate on, said James Poyser, founder of the anonymous contractor feedback site, OffPayroll.org.

“The umbrella industry will now be facing multimillion-pound claims from workers for underpaid holiday pay. Umbrella companies have no recourse to reclaim this compensation from end hirers (the companies the workers performed the work for), meaning they will need to pay compensation from their own profits,” he said.

“Given this unexpected compensation claim and the wafer-thin margins umbrella companies operate on, I believe this year we will see more umbrella companies enter administration.”

With this in mind, Poyser said contractors would be wise to double-check their payslips for unexpected deductions, as there are numerous examples of non-compliant umbrella companies using a process known as “skimming”.

This process usually sees umbrella companies deduct small sums from the pay packets of their contractors without explanation, which is put towards covering other costs of the business, which could soon include some sizeable holiday pay claims.

“Uumbrella companies must manage the complexities of holiday pay and the commercial risk surrounding this,” continued Poyser. “Unfortunately, as we have witnessed over the years, increased risk in the umbrella industry predicates unethical practices as umbrella companies turn to skims and scams at the worker’s expense to maintain their profitability.”

While umbrella companies are not subject to statutory regulation, there are two bodies that offer accreditation to firms that can prove they are operating compliantly, known as Professional Passport and the Freelance and Contractor Services Association (FCSA).

FCSA CEO Chris Bryce told Computer Weekly in a statement that his organisation is still studying the Supreme Court’s decision, but it will be taking steps to ensure its codes of compliance align with the ruling if needed.

“Our legal and tax advisors review new legislation and clarifying case law to ensure that our codes of compliance remain fully compliant with legislation,” he said.

“We also carefully consider any other official advice and guidance offered, for example by ACAS and HMRC, when making code changes. For the record, our codes were updated as recently as 1 July 2022.”

Meanwhile, Professional Passport CEO Crawford Temple said that while the ruling will require some “contractual changes” to be made with regard to how contractor-umbrella engagements are structured, he is unconvinced that it will hit the sector that hard.

“Where there are periods of time when a worker will neither be working, nor on paid leave, but where the engagement nevertheless continues and where those periods are predictable in length, then as long as the correct percentages are used there is little impact as a result of the ruling,” he told Computer Weekly.

“Where there are periods of time when a worker will neither be working, nor on paid leave, but where the engagement nevertheless continues and where such periods are not predictable in length, there is more of a problem – because the actual amount needed to make proper provision for holiday pay will depend on the number of unworked weeks, and so cannot be calculated in advance of those weeks.

“Those umbrella companies which rely on overarching employment contracts to support workers operating outside Supervision Direction and Control, which allows those workers to claim expenses, will face the highest risk because the required contractual terms, and operational processes must show an ongoing employment relationship between assignments. 

“Umbrella providers who have all their workers on contracts which are not conventionally overarching may not escape entirely, and we are likely to see updates to the employment contracts, particularly concerning termination clauses.”

The Supreme Court ruling comes several months after a Court of Appeal judgment was made public, concerning a former employee of Pimlico Plumbers. This ruling looks set to put a stop to employers withholding holiday pay from employees who have failed to take their full allocation of paid annual leave.

This ruling stated that workers can only lose the right to claim back their holiday pay if the employer can prove that it “specifically and transparently” made the employee aware that they had to take paid leave by the end of the year or would lose their holiday pay entitlement.

The result of that hearing is still to be legislated for, but is another one IT contractors have been advised to take note of if they suspect an umbrella company has withheld holiday pay from them the past.

For IT contractors that are weighing up whether to make a claim, Seeley Harris offered up the following advice on how to do so.

“I’d recommend asking your umbrella for their policy on holiday pay if it’s not already been provided. The problem will be, of course, whether the umbrella company has updated their policy to include the new case law.  Both ACAS and the Department for Business, Energy and Industrial Strategy (BEIS) have updated their policies to include the new ruling – in fact, they did that in 2020,” she said.

“Under the Working Time Regulations, a worker is entitled to 5.6 weeks holiday per year, and the Supreme Court has now said that this figure should not be pro-rated for part-time workers. This means that the old formula of 12.07% is now redundant and you need to calculate holiday entitlement by a calendar week over a 52-week reference period for the full 5.6 weeks.

“You need to check that you are being given this entitlement. You can, however, take it to a tribunal if you don’t get paid, but you must do this within 3 months of the termination date. There is now a precedent and umbrellas should take heed,” she added.