The Employment Appeal Tribunal has ruled that voluntary overtime should be factored into holiday pay.
The "groundbreaking" case is a large win for workers who claim they are being underpaid, but businesses warn that the ruling could have "disastrous" implications, the BBC reports.
The tribunal also ruled that employees would be allowed to make back-dated claims, but only for a limited time period.
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What is the issue?
Holiday wages are currently calculated based on basic pay, but unions and employees argue that voluntary overtime and commission payments should also be factored into the amount of holiday pay workers receive, as they make up a large proportion of many workers’ salaries. Today's ruling is expected to have widespread ramifications for businesses and employees across the UK.
How will it affect employees?
There are estimated to be up to five million people in the UK who work voluntary overtime and could benefit from the ruling. Employees could receive a higher rate of holiday pay if overtime is factored in, as well as receiving backdated pay worth hundreds of millions.
How will it affect businesses?
The government and businesses are against including overtime in holiday payments, and warned that a ruling in favour of its inclusion would have an impact on 400,000 firms in the UK.
"The holiday-pay time bomb could have a hugely detrimental impact on businesses up and down the country, said Simon Walker, director general of the Institute of Directors. He warns that companies could be hit with a multi-million pound bill if employees are allowed to make backdated claims.
"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 said.
"It is like being told the 50mph road you drive every day has changed to 30mph and you now owe them 20 years of backdated speeding tickets," one business owner told the Daily Mail.
What has the reaction been?
The ruling has been welcomed by trade unions who have long campaigned for employees to receive a fairer rate of holiday pay. "Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to," said Howard Beckett from the Unite union."This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order."
Business secretary Vince Cable announced will establish a task force of representatives from government and businesses to analyse and minimise the implications of the decision.
Businesses leaders were quick to condemn the ruling, warning of its cost to the economy. "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," said CBI director general John Cridland.
When will it be resolved?
The importance of this case means it is likely to be appealed to a higher court, so a final decision could still be years away. However, according to Sky News, some of the bigger names on the high street have already begun to prepare for a payout. "John Lewis reviewed its policies this summer and set aside £40m to reimburse workers," it reported.
