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British companies are facing the prospect of a multi-billion pound bill which could send many out of business if legislation is not brought forward to limit the potential liability from backdated claims, a leading business organisation has warned today.

The warning was issued by EEF, the manufacturers’ organisation which is pressing Ministers to introduce emergency legislation following a series of European Court of Justice rulings which 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.

According to EEF calculations following discussions with manufacturing companies, an average cost for an SME in the sector with a turnover of £30m will be 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 SME companies could face crippling potential costs of £4m. Moving forward, complying with the ruling from now on is likely to add an extra 4 per cent to a company payroll.

The rulings are all related to the UK’s interpretation of the Working Time Directive which granted every worker 4 weeks’ paid leave, with UK law increasingly out of step with that of Europe. Whilst most other European countries have been compliant with the new requirements, the UK has failed to keep pace, with many businesses now exposed to huge costs. Without urgent legislation, UK companies are now facing claims dating back over the sixteen year period for cumulative lost earnings.

EEF believes this a potential threat to the economic recovery and investment, at a time when business investment still remains almost a fifth below the last pre-recession peak in 2008. In response, EEF is calling for Government to ensure employers’ liability for back pay is cut from the current date of 1998 or, the start of employment.

Commenting, EEF Head of Employment Policy, Tim Thomas said: “This is potentially catastrophic for 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 for many companies, and is a serious threat to economic recovery as funds earmarked for critical investment are diverted to pay compensation. I fear in some cases this will see some businesses going bust.

“We urgently need Government to recognise the potential threat this poses and to bring forward legislation limiting the backdated liability companies will face.”