Changes to the way businesses calculate holiday pay under the Working Time Directive could lead to a surge in tribunal cases and potentially business failures, according to a leading business group.

The Confederation of British Industry (CBI) says cases could cost businesses billions of pounds in litigation expenses and back-dated pay-outs.

Holiday pay is calculated on the basis of a week’s pay – a basic salary excluding payments such as working allowances, bonuses, expenses, over-time and so on.

But a recent ruling by the European Court of Justice said these payments should be included, despite the employee being on h9oliday.

The CBI is worried that liabilities will be back-dated, lumping some firms with millions of pounds in costs. If the challenge the ruling, costs could spiral even further.

Katja Hall, CBI deputy director-general, said: “Backdated claims on holiday pay could lead to bills of millions of pounds for each business, and ultimately threaten their very existence.

“Businesses that have done the right thing and fully complied with UK law suddenly face the threat of substantial additional costs. And the companies most at risk are in vital sectors for our economy, such as manufacturing, construction and civil engineering.”