Millions of UK workers are set to receive extra holiday pay following a landmark court decision, but with the scope for historic payouts strictly limited the impact on employers is much less than feared.
Tuesday's employment appeals tribunal backed the decision in the earlier lower courts in the Amec v Law and Hertel v Wood cases that employees should have had overtime and travel payments factored into their holiday pay.
However, it ruled that employees could not claim that underpayments had been unlawful if a period of three months or more had elapsed since the leave had been taken.
Ed Goodwyn, employment law partner at Pinsent Masons, said the ruling was a "one-all draw".
He added: "For the future the employees have won, employers are clearly going to have to pay more for holiday." But he also said that the risk of backdated claims had been "holed below the waterline".
Ahead of the ruling, employers had expressed grave concern about the potential for backdating, potentially to 1998, and warned such a ruling could "wipe out" some small businesses.
Kate Hodgkiss, employment partner at DLA Piper, who advised some of the employers, said in practice it was likely to mean that employees could only claim for the most recent leave year.
"The impact for employers is significantly less devastating than feared," she said.
Under UK legislation, holiday pay has been calculated on an individual's basic salary. But a series of rulings in the European courts have indicated it should be based instead on "normal" salary.
However, this applies only to the proportion of an employee's holiday that is mandated by EU law – four weeks – raising the prospect that different rates of holiday pay could apply to different parts of an individual's annual leave.
Howard Beckett, director at legal services at the Unite union, which backed the claim, said that 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."
John Cridland, director-general of the Confederation of British Industry, said the decision was a "real blow to UK businesses" warning that "not all will survive, which could mean significant job losses".
Vince Cable, business secretary, said the government was setting up a task force to assess the possible impact from the ruling.
"Government will review the judgment in detail as a matter of urgency," he added. "To properly understand the financial exposure employers face, we have set up a task force of representatives from government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment."
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The government estimates that around a sixth of Britain's 30m people get paid overtime, meaning there could be around 5m workers affected by the ruling.
There are other cases due to come before the employment appeals tribunal later this year that will test whether commission payments – such as those paid to sales staff – also need to be taken into account.
The ruling is likely to hit hardest those sectors – such as retail and manufacturing – that rely heavily on overtime.
EEF, the manufacturers' organisation, warned that most companies in its sector would have increased payroll costs following the ruling. However, Tim Thomas, head of employment policy, said the "single biggest concern" had been a potential raft of backdated claims for which companies had no provision.
The decision could be appealed against, possibly to both the European and domestic UK courts, meaning a final ruling could be years away.