Comment: Backdated pay could wipe out small firms

THIS tribunal ruling is a major victory for workers – but it is news of the worst kind for businesses across Scotland and the UK.

Overtime ruling: good news for workers, but less so for firms. Picture: PA

The holiday pay issue has been described as a “time bomb” for industry.

And that bomb has now gone off.

The ruling flies in the face of rhetoric from business leaders, who said that applying the European decision to the UK would cost billions of pounds and bankrupt some companies.

Why such stark warnings?

The big concern is that if an employee can show that deductions from their holiday pay had happened over a long period, they could potentially make claims for many years of underpayments.

The reality is that those claims could go back as far as 16 years.

Until now, when employers have paid holiday pay to staff, they have had to do so on the basis of their base salary or pay for the period of the holiday.

They have not had to take into account any overtime or commission payments the employee would have potentially received if they had been at work.

That has all changed with yesterday’s tribunal, which has decided that holiday pay should include overtime pay.

If you are a business owner, what does this mean for you?

Well, John Lewis is an example of how seriously some employers are taking it.

The retail giant is reported to have made compensation payments to their 69,000 staff members amounting to £40 million.

The threat of employees potentially making claims for many years of underpayments seems to have been the concern that prompted the retail giant to pay out now.

But small companies look to be most at risk, and immediately after yesterday’s ruling the Federation of Small Businesses called on the UK government to bring in emergency legislation to prevent the backdated claims. The group claims failure to do so will cost thousands of jobs.

They are not exaggerating. It is perfectly feasible that some small businesses could end up being wiped out if employers – who have acted in nothing but good faith – face claims backdated as far as 1998.

But firms should probably sit tight for now. This ruling is unlikely to be the last word on the issue. It will almost certainly be appealed – again leaving employers and employees in a state of flux.

• Neil Fraser is a partner and employment law specialist at Aberdein Considine, a national, full-service law firm with offices in Edinburgh, Glasgow, Perth and Aberdeen.