Businesses warned of multi-million pound holiday pay timebomb

Darrell Matthews

Businesses face the prospect of a multi-billion pound bill, which could send many out of business if legislation is not brought forward to limit potential liability from backdated claims, a leading business organisation has warned today (Monday 14 July). 

The warning was issued by the EEF, the manufacturers’ organisation, which is pressing Ministers to introduce emergency legislation following a series of European Court of Justice rulings that open the door to potentially mass numbers of claims for holiday pay dating back to 1998. The rulings are at odds with UK law, which employers have followed, but now leaves them open to multi-million pound bills through no fault of their own.

EEF estimates that, on average, an SME manufacturer with a turnover of £30m will be looking at a £2.5m bill for holiday back-pay, as well as potential National Insurance and pension contributions, which could add an extra £250,000 to the bill.

Over a four year period SMEs could potentially face crippling costs of £4m. Complying with the ruling from now on is likely to add an extra 4% to a company payroll.

The rulings are all related to the UK’s interpretation of the Working Time Directive, which granted every worker four weeks paid leave, with UK law increasingly out of step with that of Europe. While most other European countries have been compliant with the new requirements, the UK failed to keep pace. As a result, many businesses are now exposed to huge costs.

Without urgent legislation, UK companies are now facing claims dating back over the 16 year period for cumulative lost earnings. This potential threat to the economic recovery comes at a time when business investment still remains almost a fifth below the last pre-recession peak in 2008.

The EEF is urgently calling for the Government to shield employers by limiting liability so that firms will not face bills dating back to 1998 through no fault of their own.

Darrell Matthews, North West Region Director at the EEF, says: “This is potentially catastrophic for local companies who have been fully compliant with UK law, yet now find themselves in a position which they could not have foreseen.

“This is a ticking timebomb and poses a serious threat to economic recovery as funds earmarked for critical investment are diverted to pay compensation instead. There is a real fear that this will see some businesses going bust.

“We urgently need the Government to recognise the danger and to bring forward legislation limiting the backdated liability companies face through no fault of their own.”