Businesses could end up paying out millions of pounds after the Employment Appeal Tribunal ruled today that employers need to take into account overtime when calculating holiday pay.

Previously holiday pay has only included basic salary but today’s ruling means that employers will have to rethink their holiday pay policy.

In cases Wood v Hertel (UK) Ltd Fulton v Bear Scotland Ltd , employees argued they consistently worked overtime but this was not considered when their holiday pay was calculated, meaning they were left short-changed.

The Employment Appeal Tribunal judged that overtime should have been considered, signalling that UK employers will have to rethink their holiday pay policies or face potential claims in the Employment Tribunals. 

Jacqueline Kendal head of the Employment Group at Rosling King says “Employers who are unsure should seek advice on their holiday pay policy.

“There has been a huge amount of litigation in this area recently, including rulings regarding the calculation of commission during holidays. This is unlikely to be the end of the story. Employees are likely to start claiming that bonuses should also be included in the calculation.

“An ongoing failure to pay the right amount can mean that an employee with, for example, five years’ service, could claim for the difference in holiday pay going back for the last five years.”

Business Secretary Vince Cable has announced he has set up a taskforce to look into limiting the impact of the ruling, he said. “The government will review the judgment 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.”