A ruling that overtime must be taken into account when calculating holiday pay is expected to cost UK firms many billions of pounds and may forever change the way North Sea oil and gas workers are rewarded.
The anticipated cost comes after the Employment Appeal Tribunal decided two cases relating to the UK’s interpretation of the European Union working time directive.
Lawyers warned the ruling to base holiday pay on wages plus overtime and commission – likely to be appealed against – could lead to claims on a par with the recent payment protection insurance (PPI) mis-selling scandal in the banking industry.
Andy Willox, the Aberdeen-based Scottish policy convener for the Federation of Small Businesses (FSB), said it would hurt as many as 30,000 smaller firms north of the border and created a “real risk” of company closures and job losses.
He added: “It would be desperately unjust to expect Scottish businesses to pay retrospective compensation for how they calculated holiday pay when they were fully compliant with the law as it was understood at the time.
“The FSB has been appointed to a UK Government taskforce to examine this issue and will be fighting hard for small businesses to be insulated from the uncertainty and legal risks this ruling brings.”
A recent survey of FSB members found nearly one-third of them (31%) paid voluntary overtime. More than one in 10 (11%) also offered some form of commission.
Neil Fraser, partner and employment law specialist at north-east law firm Aberdein Considine, said workers could be entitled to payouts dating back almost two decades.
“This is bad news for employers, who now face costs running into billions of pounds” Mr Fraser said, adding: “Today’s decision, which is likely to be appealed, is another in an increasingly long line which have gone in favour of employees and against employers.
“These all stem from the attitude of the European courts that employees should not be dissuaded from taking holidays due to a potential drop in earnings.
“Any employee taking paid time off should receive the same pay during that time off, as if they remained at work.”
Companies behind the test cases which led to the ruling included Scottish roads maintenance consortium Bear Scotland, whose managing director, Brian Gordon, said: “This interpretation of the working time directive is significant for all UK employers, public and private, and we will reflect on our position before considering how to respond.”
Diane Nicol, a Glasgow-based partner and head of employment law at Pinsent Masons, said: “This case has been likened to PPI in terms of its potential to generate claims. That says something about the scale of this issue.”