Employers are urging the government to rush through emergency legislation to save thousands of companies from having to pay out hundreds of millions of pounds in backdated holiday pay to up to 5 million people.

The Institute of Directors (IoD), the British Chambers of Commerce (BCC) and the Federation of Small Businesses (FSB) warned on Monday night that hundreds of businesses would go bust unless the government acts to prevent employees lodging pay claims following a historic legal ruling expected on Tuesday.

Two employment appeal tribunals are due to rule on whether voluntary overtime should count towards holiday pay. If the rulings are in the employees’ favour, up to 5 million people could claim for extra holiday pay dating back to 1998. Employment lawyers said the claims could soar into the hundreds of millions of pounds as one-sixth of the UK’s 30 million-strong workforce work voluntary overtime.

Mike Cherry, policy chairman of the FSB, said: “The government must bring in emergency legislation to prevent the backdated claims. [If they don’t act] hundreds of businesses will shut down and that will lead to thousands of employees being laid off.

“Business has done everything it could to comply with the law at the time and now to have it changed is totally wrong. Our members are very clear about this – it could have severe implications.”

Holiday wages are normally calculated on basic pay, but workers and trade unions argue that overtime and commission payments should be included as they can form a large proportion of total take-home pay.

Barry Smith, legal officer of the GMB union, said: “We hope the ruling will clarify the elements to be included in the calculation of holiday pay.

“For many workers, overtime, shift payments, unsociable hours payments and other allowances are currently excluded from their holiday pay, and they should be included.”

Simon Walker, director general of the IoD, which represents company bosses, said: “The holiday pay timebomb could have a hugely detrimental impact on businesses up and down the country.

“It is not an exaggeration to say that some small businesses could end up being wiped out if employers who have acted compliantly and in good faith face underpayment claims backdated as far as 1998.

“Not only do businesses face a huge spike in operating costs, but employees would also be encouraged to book holidays following bonuses or good overtime periods as it would enhance their pay. This would be an administrative nightmare on a number of fronts.”

The BCC said employers could face “significant financial losses which could force them to close their doors altogether”.

The government, which supports the employers in their stance against making the payments, declined to comment on how it would respond to the ruling, but a spokesman said: “We understand the deep concern felt by many employers and have intervened in the employment appeal tribunal cases to make our views clear.”

The complex tribunal cases revolve around the EU’s working time directive which gives staff the right to 28 days’ paid holiday a year. Some tribunals have decided, looking at past court of justice of the European Union (CJEU) rulings, that average earnings should be used as the basis for holiday pay calculations.

The holiday pay cases involving employees of the industrial services company Hertel and the roads maintenance business Bear Scotland were heard by an employment appeal tribunal during the summer.

In dispute is whether the UK working time regulations, implemented in 1998, give force to this more generous interpretation of holiday pay, whether such enhanced rewards should apply to holidays longer than 20 days, and whether the average income should be based on pay received over the previous 12 weeks or a year.

This year a tribunal in the case of Lock v British Gas Trading Limited found that commission should now be included in an employee’s holiday pay.

(Published by The Guardian  - November 3, 2014)