Business leaders in the West Midlands are fearful of the impact of a tribunal ruling that overtime should be taken into account when holiday pay is calculated.
The decision by the Employment Appeal Tribunal (EAT) paves the way for payouts worth thousands of pounds to workers.
Business groups in the region have dubbed the ruling “potentially very damaging” with companies warning they face a huge bill which could send some to the wall.
However, the Unite union said the ruling secured justice for workers who had been “short-changed” by not having overtime count towards holiday pay, although it insisted it did not open the flood gates because claims will be limited.
Jerry Blackett, chief executive of Greater Birmingham Chambers of Commerce said: “Today’s ruling has potentially very damaging consequences to businesses across the Greater Birmingham region.
“Our most recent Quarterly Economic Survey shows that Greater Birmingham firms are looking to take on staff but often face recruitment difficulties. This ruling could serve as a disincentive for companies wanting to recruit because of the risk of increased labour costs.
“Unemployment rates in the region are twice the national average in some instances and the labour market situation is very tentative so today’s ruling will not be welcomed by many businesses.”
The judgments ruled that the calculation of holiday pay based on working time regulations introduced in 1998 was not correct and must now include overtime and can include backdated claims.
The tribunal ruled on two cases relating to the UK’s interpretation of the Working Time Directive - one involving electricians, scaffolders and semi-skilled operatives who worked on a project at the West Burton power station site in Nottinghamshire for Amec and Hertel, and one involving road maintenance firm Bear Scotland.
Johnathan Dudley, managing partner of the Midlands office of advisory firm Crowe Clark Whitehill, said: “It is likely that this decision will affect all manufacturers, especially if the decision is significantly backdated as has been implied.
“If there is to be significant backdating, then the decision will almost certainly be appealed, causing uncertainty for what could be several years.
“Any uncertainty could cause difficultly for accountants and auditors alike and could also affect corporate finance and funding transactions.”
David Wignall, partner and leader of the Human Resource Services team for PwC in the West Midlands, said: “Businesses should not underestimate the impact of this ruling as employees are likely to jump at the chance to claim back any extra money due to many seeing little real increase in their earnings in recent years.
“From discussing this issue with retail and manufacturing businesses, where it is common for large numbers of employees to work significant amounts of overtime, there is real concern that an influx of claims could have a substantial and serious impact on their bottom line and could threaten their survival.”
More than nine in 10 manufacturers are set to see payroll costs “spiral” as a result of the ruling, the manufacturers’ organisation EEF warned.
The group said over two-thirds of manufacturers estimate that the change to holiday pay calculations will add more than three per cent to their current payroll costs, while two out of five anticipate an increase of at least five per cent.
But Unite said their members consistently worked overtime, but that was not included in holiday pay, meaning they received “considerably less” pay when on holiday compared with when they were working.
Unite executive director for legal 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.”