The Government has set a limit of two years for claiming back pay following a landmark tribunal ruling that overtime should be taken into account when holiday pay is being calculated.

Ministers set up a task force last month to assess the impact of a decision by the Employment Appeal Tribunal, which unions believe paved the way for payouts worth thousands of pounds to workers.

The Government announced that it was taking action to reduce potential costs to employers, as well as giving certainty to workers on their rights, after the ruling.

A statement said: "The Government recognises the decision of the court and is today taking action to protect UK business from the potentially damaging impact of large backdated claims. Changes made to regulations under the Employment Rights Act 1996 will mean that claims to employment tribunals on this issue cannot stretch back further than two years.

"Workers can still make claims under the existing arrangements for the next six months, which will act as a transition period before the new rules come into force. The changes apply to claims made on or after 1 July 2015."

A Business Department spokesman said: "We have listened carefully to the concerns of business groups about the substantial extra costs that could be incurred as a result of backdated pay claims and have acted quickly to reduce uncertainty for both workers and employers.

"Limiting backdating claims to two years strikes the best possible balance between reducing costs on business and respecting the right of workers to receive their correct holiday pay."

Maria Ludkin, legal officer of the GMB union, said: "There is no longer any reason for employers to drag their feet on discussing how they plan to correctly calculate pay for all future holidays."

TUC general secretary Frances O'Grady said: "Failing to count overtime when calculating holiday pay is quite simply wrong. The November ruling was a victory for hardworking people who deserve to be properly paid when they take their well-earned leave.

"Today's decision to limit all claims for unpaid wages to two years is a blatant attempt to water down last month's ruling. At the moment, the law on back pay mirrors the rules on commercial debt, which can be pursued for six years in most of the UK. Today's announcement smacks of treating workers as second-class citizens, treating commercial debt more favourably than wages."

Katja Hall, CBI deputy director-general, said: "The recent decision of the employment appeal tribunal, that regular overtime should be included in holiday pay, still leaves many businesses facing the risk of retrospective claims.

"But the CBI presented a compelling argument to Government to remove this threat to business and jobs, and restricting backward-looking claims to two years will go some way to limiting risk for businesses that justifiably believed themselves to be fully compliant with UK law."