Millions of workers will enjoy a huge boost to their rates of holiday pay following a landmark ruling today.
It could mean members of staff who clock up many hours of overtime will be able to afford to take more time off work and book more expensive holidays.
The decision by the Employment Appeal Tribunal will force employers to take total levels of pay - including overtime - into account when setting rates of holiday pay. Currently just basic pay is used as the yardstick.
However, businesses said it could trigger billions of pounds worth of claims for backdated holiday pay.
The government estimates that one-sixth of the 30.8 million people in work get paid overtime. This means around five million workers could benefit.
Under European law, staff are entitled to a minimum of four weeks’ holiday pay a year but there are no details on how it should be calculated.
The UK’s interpretation says holiday pay should be at the basic rate, effectively penalising those who work overtime or receive variable pay.
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 for legal, membership and affiliated services, 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.”
But Simon Walker, director general of the Institute of Directors, said: “The holiday-pay time bomb 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.”
He added that employees would be encouraged to apply for holidays after working a lot of overtime, leading to “an administrative nightmare” for companies.
A spokesman for the Department of Business, Innovation and Skills said: “The government wants to get the right balance between the needs of employers and employees,” said a spokesperson for the Department.
“We do not believe voluntary overtime should be included in holiday pay and are concerned about the potential impact on employers.
“We have spoken with business groups and listened to their concerns, as well as intervening in the case to make clear our view.”
