The holiday pay ruling is expected at the UK Employment Appeal Tribunal (EAT) on 4 November Reuters

A critical employment ruling could severely damage small companies in the UK, according to some of the country's most influential business bodies.

The ruling, expected at the UK Employment Appeal Tribunal (EAT) on 4 November, could see millions of workers given additional holiday pay if they receive overtime or commission payments.

The case will provide the first UK interpretation of a controversial European Court of Justice decision, which will decide the extent of UK businesses' liability for payment of holiday pay in cases where employees routinely earn extra money on top of their basic salary through voluntary overtime.

"These rulings could have a significant cost implication for those businesses that pay voluntary overtime or commission and firms will need to look at how they structure pay and overtime," said John Allan, the national chairman of the Federation of Small Businesses.

"However, our biggest concern would be the threat posed by backdating the ruling. This could trigger multiple claims going back many years and create substantial unexpected cost liabilities for employers.

"It seems extremely unfair that businesses who have tried to do the right thing – getting the best legal advice at the time – could be hit with a bill which no one knew was coming."

The comments come after a survey of FSB members found a third (31%) of small businesses with employees paid staff for voluntary overtime.

In addition, one in 10 (11%) of small firms with staff also offered some form of commission.

The FSB said this means the ruling could impact as many as 400,000 UK small businesses.

Simon Walker, director general of the Institute of Directors, also warned the ruling could "wipe out" small employers.

"The holiday pay time bomb could have a hugely detrimental impact on businesses up and down the country," Walker said.

"It is not an exaggeration to say that some small businesses could end up being wiped out if employers who have acted compliantly and in good faith face underpayment claims backdated as far as 1998.

"Not only do businesses face a huge spike in operating costs, but employees would also be encouraged to book holidays following bonuses or good overtime periods as it would enhance their pay. This would be an administrative nightmare on a number of fronts."