Court of Appeal provides welcome clarity on discretionary payments under Holidays Act

Employers can now breathe a sigh of relief when it comes to discretionary payments and holiday pay.

The Court of Appeal recently released its judgment in Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business, Innovation and Employment [2021] NZCA 560, clarifying that, where employers have the contractual ‘final say’ regarding a pay-out, discretionary payments will no longer constitute a part of gross earnings for the purposes of calculating holiday pay under the Holidays Act 2003 (HA 2003). This includes bonuses and short-term incentive schemes, and any other written scheme contained within or outside the employment agreement.

Employment Court

Metropolitan’s short-term incentive bonus scheme (STIB scheme), contained in a separate document to the employment agreement, stated that payments made under the STIB scheme were at the discretion of the Board of Directors and that there was no guarantee of any payment, even if performance targets were achieved.

Despite the STIB scheme’s careful wording, the Employment Court reasoned that:

  • the definition of gross earnings under the HA 2003 captured productivity and incentive-based payments, in contrast to ‘truly gratuitous’ payments such as a one-off Christmas bonus; and
  • as payments under the STIB scheme were incentive-based, Metropolitan could not avoid its holiday pay responsibility by labelling the scheme as discretionary and by making the payments variable or conditional.

With six years for employees to make backpay claims for holiday pay from discretionary payments, the decision had potentially huge ramifications for businesses and was highly controversial.

Court of Appeal

The Court of Appeal disagreed with the Employment Court’s approach. It found the Employment Court had erred by not considering whether a residual discretion not to make any payment, even if all conditions were met, took the scheme  outside the scope of ‘gross earnings’ and into the territory of a discretionary payment.

The Court explained that “…the hallmark of a discretionary payment and what distinguishes it from gross earnings is that it is a payment the employer is not contractually bound to make. If the employer was contractually bound to make the payment, then subject to a limited number of specified exceptions, it is gross earnings. The source of the employer’s contractual obligation is irrelevant.”

In other words, if the employer has ultimate discretion, contractually, to pay or not to pay, then bonus and/or other incentive payments do not need to be taken into account as part of gross earnings for the purpose of calculating holiday pay.

The Court ended its judgment by noting that employers are still required to exercise their discretion fairly and reasonably, and a failure to do so could be grounds for a personal grievance, but for the purposes of the HA 2003, being neither guaranteed nor conditional, the payment would still retain the character of a discretionary payment.

Potential change ahead

Fair warning: it may be the case that the Court of Appeal’s determination will, once again, be swept aside by the incoming legislative changes to the HA 2003.

The following simplified definition of ‘gross earnings’ has been proposed by the Holidays Act Taskforce for leave payment calculations: “an employee’s leave payment should reflect all cash payments received, except direct reimbursements for costs incurred”. This would effectively include all payments, discretionary or not. However, with the draft legislation and select committee process still to come, we are not expecting a new Act to commence until 2024.

For now, the Court of Appeal’s decision stands and provides welcome clarity to employers.

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