Update: 19 December 2014: The Government yesterday announced that from 1 July 2015 workers will only be able to backdate claims by a maximum of two years.
Overtime worked should be taken into account when holiday pay is calculated, the Employment Appeal Tribunal has ruled today in a decision that could pave the way for up to five million workers to claim backdated holiday pay.
The Employment Appeal Tribunal has today ruled in favour of workers in cases relating to the UK's interpretation of the EU Working Time Directive.
Currently all employees are entitled to holiday pay but most employers use only an employee's basic pay to calculate how much this should be. The case centred on workers who regularly worked overtime and who claimed their holiday pay should be higher to reflect this.
Unions have welcomed the decision as they claim hundreds of thousands of workers do voluntary overtime but that this is not included in holiday pay, meaning they receive "considerably less" pay when on holiday compared to when they are working.
According to the latest Government figures, there are currently 30.8 million people in employment and of those, one in six (five million people), undertake paid overtime.
Today's ruling could open the floodgates for workers to claim additional holiday pay in future, and potentially also backdated holiday pay.
The firms involved in today's judgment have been given permission to appeal the decision at the Court of Appeal. MoneySavingExpert.com has asked the law firms acting on behalf of the companies whether they will appeal and we were told they were "considering their options". We'll update this news story when we hear more.
Backdated holiday pay
The Working Time Regulations 1998 states that workers have to bring backdated payment claims within three-months from the date of the unlawful deduction.
But there has been some speculation that workers could get backdated holiday pay all the way back to when the Working Time Directive first came into effect in 1998 and the Government has said it is looking into the issue "as a matter of urgency".
Business secretary Vince Cable says: "Government will review the judgement in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.
"Employers and workers can also contact the ACAS helpline for free and confidential advice."
The number to call for ACAS is 0300 123 1100. Those belonging to a union should also approach their union for advice and some have already started contacting members asking them to get in touch if they are affected.
Kate Hodgkiss, partner at DLA Piper Scotland LLP which represented the firms, also says today's decision has the potential for some workers to bring backdated payment claims from beyond three months ago.
She says: "Those carrying out non-guaranteed overtime, which is offered by an employer on a contractual basis, are more likely to have an entitlement claim as they could argue this is normal remuneration.
"However those who perform overtime on an ad hoc basis are under no obligation to do this meaning it's not part of the normal remuneration package, therefore they're less likely to have an entitlement to claim.
"Employers will now be looking at how they pay holiday pay and they will be reviewing existing schemes and additional payments. Today's judgment has clarified that the wording within the Working Time Regulations needs to be updated."
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'Employers have to get their house in order'
Unite's executive director for legal, membership and affiliated services Howard Beckett says: "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 shortchanged, 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."
However, many companies have warned that they face a multi-billion pound bill to cover backdated claims, which could put some out of business as a result of today's decision.
What are the cases about?
Today's ruling follows an appeal by Bear Scotland, a road construction and maintenance firm in Scotland, against an earlier decision by an employment tribunal which found that it made unauthorised deductions from the wages of two employees, David Fulton and Douglas Baxter, by failing to include overtime and other payments associated with their work in calculating the holiday pay due to them.
Two separate companies, Hertel and Amec, also appealed a decision that they made unauthorised deductions from wages of employees working on a construction site at West Burton in England by failing to include overtime when calculating holiday pay. As the cases raised the same issues, they were heard together at the Employment Appeals Tribunal.
All three cases centred on the right to paid holiday under the Working Time Regulations 1998, now the Working Time Directive 2003, which states: "A worker is entitled to be paid in respect of any period of annual leave to which he is entitled, at the rate of a week's pay in respect of each week of leave."
What did the judgment say?
The judgment reads: "The essential feature of the Regulations is that holidays should be paid. That is not in issue. What is in question is, rather, the principle by which the amount of that payment is to be calculated. The obligation to construe legislation 'as far as possible' to conform is a powerful one.
"It seems plain to me that a worker on site is paid for his time, which he would not otherwise be obliged to spend there. When on holiday, he would not spend time on site, but it is plain that the pay he receives as calculated by reference to the hours spent when at work forms part of holiday pay.
"Article 7 of the Directive provides for non-guaranteed overtime to be reckoned as part of normal remuneration when calculating holiday pay; and it is possible for the Working Time Regulations to be construed so as to conform."
Additional reporting by the Press Association