West Midland companies are sitting on a powder keg that threatens to spark an explosion of back-pay claims with crippling financial consequences, an employment law specialist has warned.

The crisis is looming over rolled-up holiday pay, a salary system many firms have adopted in their dealings with employees who work irregular hours, says Ranjit Dhindsa, a partner in the Midlands office of international law firm Reed Smith.

Mistakes in the way holiday pay is calculated have resulted in thousands of workers being accidentally short-changed - and Ms Dhindsa is urging employers to carry out internal audits to determine their level of exposure.

"They should do it before the flood gates burst and they are faced with massive class actions by employees claiming they have been under-paid," said Ms Dhindsa who warned that in some cases the sums involved could run into hundreds of thousands of pounds.

The extent of the threat was demonstrated when the BBC discovered its own mis-take in calculating holiday pay, and agreed to make payments of up to £4,000 to 11,000 shift workers. Ms Dhindsa said: "With normal salaried staff and hourly-paid workers, holiday pay kicks in when employees take their four week annual leave entitlement.

"But with irregular work-ers, whose flexible shift patterns can mean they are absent from the workplace for much more than four weeks, it is almost impossible to do a straightforward calculation, and that is where the mistakes happen."

The solution for many firms has been to add a fixed percentage to the agreed hourly rate - rolling the holiday pay up into the weekly or monthly pay cheque.

But union officials claim this practice leaves the system open to abuse by some unscrupulous employers who simply pay the normal hourly rate, and claim it includes an element of holiday pay.

Ms Dhindsa, who heads Reed Smith's employment law team in the Midlands, says recent court rulings have highlighted flaws in the way rolled-up holiday pay is calculated by many companies.

The most recent decision by the European Court of Justice effectively declares the practice unlawful, says Ms Dhindsa. The exception is when pay slips provide a t ransparent breakdown showing what proportion of the salary is in respect of holiday pay - and that it is a genuine extra payment.

Opponents of rolled-up holiday pay argue that as well as short-changing employees it discourages them from taking their holiday entitlement of four weeks paid leave a year.

Ms Dhindsa believes not all employers take enough care in separating the hourly rate from the holiday element.

"Most employers in the UK have taken the view that rather than pay this group of workers when they are actually on holiday, they prefer to pay 'up front' against any holiday entitlement taken during the year," she said.

"There has been a debate going on for some time about whether this is lawful."

The situation is no clearer after the ECJ ruling than it was before, because English Law and EU law don't agree.

"This a very difficult situ-ation for employers to manage," she said.

"My message to them would be that they might be sitting on back-pay claims that neither they, nor their employees, are aware of at present.

"It could only take one person to raise the issue for the floodgates to burst on a series of extremely costly class actions. Although the BBC case didn't go to court, it indicates the potential size of some of the actions that might be mounted.

"Employees affected by the ruling could claim back pay from 1998, when the Working Time Regulations were introduced, and although this might be a nice windfall for them it is a cash flow nightmare for employers."