Overtime should be taken into account when holiday pay is calculated, the Employment Appeal Tribunal has ruled.
The tribunal ruled on two cases against Hertel UK and BEAR Scotland, which related to the UK's interpretation of the Working Time Directive.
Workers for these companies claimed their holiday pay was less than it should have been because their employers did not factor in voluntary overtime completed in the period prior to time off.
Brian Gordon, managing director BEAR Scotland, said they were "disappointed" by the decision.
"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," he said
But unions welcomed the ruling, with Unite executive director Howard Beckett saying: "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."
Business groups have described the ruling as a "blow" to business, with Confederation of British Industry director-general John Cridland warning of "punitive costs potentially running into billions of pounds".
"Not all will survive - which could mean significant job losses," he said.
"These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.
"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."
Tim Thomas, head of employment policy for manufacturers' organisation EEF, said 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.
Some businesses had already prepared for the worst, with John Lewis setting aside £40 million to reimburse workers.
Business Secretary Vince Cable told Sky News: "Our preliminary assessment is that the impact is likely to be modest."
When asked by Business Presenter Ian King whether the ruling could lead to job losses, he said: "If there is a very substantial cost to business, then that may well be the result, and we would very much regret that."
The Lib Dem confirmed a taskforce has been set up to discuss how to limit the impact of the decision for businesses, adding: "Employers and workers can also contact the Acas helpline for free and confidential advice."
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