Bosses are likely to “vigorously oppose” a ruling that could cost them billions of pounds in backdated overtime pay.
The Employment Appeal Tribunal has ruled that overtime should be taken into account when holiday pay is calculated.
The move was welcomed by the Unite union, which said it would pave the way for possible payouts worth thousands of pounds to workers.
But companies claimed they would face a multi-billion-pound bill – which could put some out of business – if firms had to make payments retrospectively..
The Employment Appeal Tribunal ruled on two cases relating to the UK’s interpretation of the Working Time Directive, including one involving electricians, scaffolders and semi-skilled operatives who worked on a project at the West Burton power station site in Nottinghamshire.
Unite said they consistently worked overtime, but that was not included in holiday pay, meaning they received “considerably less” pay when on holiday compared to when they were working.
Unite executive director Howard Beckett said: “Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to. This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order.
“Employers will now have to include overtime in calculating holiday pay and those that don’t should be under no illusion that Unite will fight to ensure that our members receive their full entitlement.”
Steven Leigh, head of policy at the Lockwood-based Mid Yorkshire Chamber of Commerce, said: “This will be vigorously opposed by all sorts of businesses. It is all a bit of a shock and businesses will need time to digest the full implications.
“If there is going to be a case for re-examining overtime payments going back years, it could take years to resolve.
“It could involve hundreds of million of pounds. That money will have to be found by businesses and that has a potential cost on the prices they charge, their profits and jobs.”
Mr Leigh said: “Businesses will need adequate notice if they have to pay – not an instant demand like the EU demand for £1.7bn from the UK on the first of December.”
He predicted the tribunal ruling would be vigorously opposed in the law courts and warned: “In the case of people paid weekly who may have moved from job to job, attempting to go back looking through records of employment will be a huge task.”
Paul Kenny, general secretary of the GMB union, said: “This win in the Employment Appeal Tribunal clarifies that overtime should be included in the calculation of holiday pay. For many workers, overtime, shift payments, unsociable hours payments and other allowances were excluded when they should be included.
“GMB is asking members who did not get the same pay during holiday as during the rest of the year to contact the union so that we can assess and take forward their claims.”
John Cridland, director-general of the employers’ body the CBI, said: “This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses.
“These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.
“This judgment must be challenged. We need the UK Government to step up its defence of the current UK law and use its powers to limit any retrospective liability that firms may face.”