Companies are braced for a wave of back claims following a landmark ruling on holiday pay by the Employment Appeal Tribunal, with 400 Scottish cases already said to be in the pipeline.

The tribunal's ruling looked at whether variable elements of pay, such as overtime and allowances, should be included in holiday pay calculations.

It covered two claims involving road maintenance firm Bear Scotland, and others involving Amec and Hertel.

Employment Judge Kearns in Glasgow had found that Bear Scotland, which carries out road construction and maintenance, had 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.

Brian Gordon, managing director Bear Scotland said: "We are disappointed at the decision of the Employment Appeal Tribunal. We believe that we were complying with UK law and common industry practice as some of the employees concerned brought their cases following TUPE transfer from other employers.

"We believe that this interpretation of the Working Time Directive is significant for all UK employers, public and private, and we will reflect on our position before considering how to respond."

Unions welcomed the decision on test cases, which could lead to claims by hundreds of thousands of workers who do voluntary overtime.

But companies warned they face a multibillion-pound bill which could put some out of business.

The Employment Appeal Tribunal said: "Article 7 of the Working Time Directive is to be interpreted such that payments for overtime which the employees in two appeals before it were required to work, though which their employer was not obliged to offer as a minimum, is part of normal remuneration and to be included as such in the calculation of pay for holiday leave taken under Regulation 13 of the Working Time Regulations 1998. Those Regulations could be interpreted so as to conform to that interpretation.

"An appeal by Bear Scotland was thus rejected, as were (on these issues) appeals by Hertel and Amec."

Unite executive director for legal, membership and affiliated services, Howard Beckett said: "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 short changed, 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.

Paul Kenny, general secretary of the GMB union, said: "This win in the Employment Appeal Tribunal clarifies that overtime should be included in the calculation of holiday pay. For many workers, overtime, shift payments, unsociable hours payments and other allowances were excluded when they should be included.

"GMB is asking members who did not get the same pay during holiday as during the rest of the year to contact the union so that we can assess and take forward their claims."

However, legal experts have warned that, while today's verdict is likely to be appealed, the decision should be sounding alarm bells in boardrooms throughout Scotland as the outcome could impact on company financial results, and severely affect sectors such as oil and gas which rely on flexible workforces.

Diane Nicol, Glasgow-based head of employment law at Pinsent Masons, said: "This case has been likened to PPI in terms of its potential to generate claims. That says something about the scale of this issue - although a more direct comparison might be the equal pay claims which have rumbled on in the public sector for years and have cost the public sector millions. There will also be significant complicating factors relating to pensions and benefits.

"HR directors have been aware of this problem for some time but have not always been able to get the necessary traction with their boards that this is a material risk. Today's decision changes that. We're now likely to start seeing provisions in the annual reports for listed companies to account for this.

"There has also been speculation over whether such provisions could further dampen the prospects for pay-rises, and some employers may restrict certain types of allowances until there is greater legal and financial clarity. The net effect is that overall workforce flexibility could be reduced. Organisations which rely on overtime, particularly those in seasonal industries such as retail, will be particularly exposed.

"Meanwhile, the trade unions are already pursuing claims and approaching employers directly to ask for settlement proposals. This decision is likely to encourage more of those claims to be pursued by trade unions, claims management companies and by individual employees."

Katie Williams, an Aberdeen-based employment lawyer specialising in the oil and gas sector, added: "The offshore oil and gas industry needs to be aware of how this ruling impacts the way it pays its work orce. It's important to remember this is not about how much holiday employees are entitled to, but how much people are paid. Allowances, offshore bonuses and uplifts and per diems are all regular and commonly used methods of paying those who work offshore.

"North Sea operators now need to assess their exposure to back pay deemed to be owed to employees and carefully review payroll and HR records to make sure they have all of the relevant information to hand.

"This could change how offshore workers are compensated. It could be that variable pay arrangements are scrapped by some employers in favour of standard salary contracts as businesses seek to comply with holiday pay regulations.

"The North Sea oil and gas industry has long been viewed as a market leading and innovative industry. Companies need to be ahead of the game in every respect, including compensation, to ensure this position is maintained."

More than nine in 10 manufacturers are set to see payroll costs "spiral" as a result of the ruling, the manufacturers' organisation EEF warned.

The group said over two-thirds of manufacturers estimate that the change to holiday pay calculations will add more than 3% to their current payroll costs, while two out of five anticipate an increase of at least 5%.

Firms will have little option but to factor the additional costs in to future pay negotiations and to reduce overtime, while one in four could cut jobs, said the EEF.

"The findings demonstrate the scale of the issue for British manufacturers, who are being punished for adhering to, or even exceeding, UK legal requirements. The decision to apply stringent new EU laws on how holiday pay should be calculated will require employers across Europe to now factor in additional payments such as overtime and commission.

The ruling could also leave companies open to paying National Insurance contributions on the backdated pay. The changes could land businesses, including small and medium-sized firms, with extensive bills through no fault of their own," said the EEF.

It urged the Government to protect businesses by limiting the timeframe for backdated claims to significantly less than six years and to prevent employers from facing tax and National Insurance penalties.

Tim Thomas, head of employment policy at EEF, said: "Today's ruling is a blow for employers, but we won't see the full extent of damage until further down the line. It's clear that many businesses will now be left facing difficult choices, despite having always complied with UK law, and there is a real danger that this ruling could ultimately hit jobs, pay and future investment.

"This is why ministers across Government must act now to protect employers from the fallout. Without immediate Government action this ruling will undoubtedly impact on the competitiveness of UK plc and put future jobs and investment at risk."

Andrew Stones, employment partner at international law firm Squire Patton Boggs, who led the appeals on behalf of two of the employers in this case, said: "The entire business community has kept a very close eye on these appeals, given both the range of issues being considered and the shared concern amongst employers of the potential impact of historic holiday pay claims. Those concerns should largely be alleviated following the judgment of the Employment Appeal Tribunal today.

"Although opinions are mixed and we do not agree with some of the findings, we are pleased with the limits put in place on retroactive claims. The EAT has really limited the scope for different holiday pay periods to be linked together as one ongoing series of deductions for historic claims. This finding will significantly limit the scope for such claims in the future and the flowing potential liability for companies.

"While there are likely to be many businesses across the country, both big and small, that are still concerned about how this judgment could impact them, this is a very significant and positive finding for employers worried about retrospective liability.

"In terms of what employers should be doing now, it seems sensible to wait and see if any of the parties appeal. Nevertheless, employers may wish to begin considering how the findings affect the way in which they are currently calculating holiday pay."

CBI director-general John Cridland said: "This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds - and not all will survive, which could mean significant job losses.

"These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.

"This judgment must be challenged. We need the UK Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face."

Business Secretary Vince Cable said: "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.

"Employers and workers can also contact the Acas helpline for free and confidential advice."

Adam Marshall, executive director of Policy and Public Affairs at the British Chambers of Commerce said: "This ruling is damaging for businesses across the UK. Firms could be at risk of incurring significant financial losses, which could force them to close their doors altogether.

"Managers across Britain are now in the difficult position of having to carry out more complex calculations for holiday pay; estimating overtime and commission rates of staff on holidays. This expanded definition of 'pay' is so ludicrous that the Government itself has argued against it. No business should have to pay more than base salary during holiday periods, unless they elect to do so.

"What businesses fear most is that these judgments will open the door to backdated claims, which could run into the billions. Firms which have complied with existing regulations are shocked by the thought of having to back-pay holiday entitlements - a change they could not have predicted.

"The pressure being placed on businesses by both the British tribunals and European courts on the issue of holiday pay is becoming unbearable. After the worst recession in living memory, with many companies working to reverse pay cuts and invest in their employees, giant new pay claims could be a huge blow to their growth prospects."

TUC general secretary Frances O'Grady said: "Failing to count overtime when calculating holiday pay is quite simply wrong. This ruling marks a victory for people who work long and hard to make a living, and who deserve to be properly paid when they take their well-earned leave.

"Scaremongering about the possible impact of this ruling is irresponsible. British business is far more robust than some of its spokespeople would admit. It's worth remembering that in 1999 a change in the law meant that six million people gained more holiday entitlements, and businesses easily absorbed the increase and employment continued to rise."

Brian Gordon, managing director of Bear Scotland, said: "We are disappointed at the decision of the Employment Appeal Tribunal. We believe that we were complying with UK law and common industry practice as some of the employees concerned brought their cases following Tupe transfer from other employers.

"We believe that this interpretation of the Working Time Directive is significant for all UK employers, public and private, and we will reflect on our position before considering how to respond."

John Allan, chairman of the Federation of Small Businesses, said: "Today's ruling leaves many questions unanswered. It has the potential to be very damaging to small businesses, presenting a real risk of small firms being forced to close down if faced by retrospective claims.

"Clearly it would be desperately unjust to expect businesses to pay retrospective compensation for how they calculated holiday pay when they where fully compliant with the law as it was understood at the time."

Prime Minister David Cameron's official spokesman said the Government had "concerns in regard to the potential cost to businesses" of the ruling.

"That is why the Government was party to the proceedings and why Vince Cable has set up the group which will bring together the Government and representatives of businesses, including the Federation of Small Businesses, to look at the potential detailed consequences of the ruling," said the spokesman.