New Zealand: Discretionary Payments under Holiday Pay
On October 26, 2021, the New Zealand Court of Appeal passed a long-awaited decision in Metropolitan Glass & Glazing Limited v Labor Inspector case, wherein the Employment Court erroneously concluded that the discretionary payments made by Metropolitan Glass under its Short Term Incentive Bonus Scheme (STIB scheme) to employees fell within the definition of “gross earning” under Section 14 of the Holidays Act.
For the purpose of calculation of an employee’s holiday pay, either the employee’s ordinary weekly pay or average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday (whichever is greater) is taken into account. Here, average weekly earnings mean 1/52 of an employee’s gross earnings.
Under the Holidays Act, “gross earnings” in relation to an employee for the period during which the earnings are being assessed means all payments the employer is required to make under the employment agreement, including, for example –
- salary and wages
- allowances (but not reimbursing allowances)
- all overtime
- piece work
- at-risk, productivity, or performance payments
- payment for annual holidays and public holidays
- payment for sick and bereavement leave
- the cash value of board and lodgings supplied
- the first week of compensation payable by the employer
- any other payments that are required to be made under the terms of the employment agreement.
What is not included in Gross Earnings?
Unless the employment agreement says otherwise, reimbursement payments, ex gratia payments, and discretionary payments (e.g., genuinely discretionary bonuses) are not included in the gross earnings calculations.
Discretionary payment is defined as a payment that the employer is not bound by, under the employee’s employment agreement, to pay.
If an employer is required to make a payment to the employee under the employment agreement, commission scheme, bonus scheme rules, etc, then it is not a discretionary payment and it must be included. This is the case even if the payment amount is discretionary and could even be $0.
The Employment Court stated that incentive payments provided for in Metropolitan Glass’ policies had contractual force and formed part of the definition of “gross earnings” for the purpose of holiday pay calculations. This decision was based on the Employment Court’s finding that the parties had intended the STIB schemes to have contractual force, as the STIB schemes were put in place to incentivize employees to meet key deliverable targets.
The Court of Appeal in its judgment established that the genuine discretionary payments included in contractual documents can be excluded from holiday pay computations. Furthermore, the Court of Appeal stressed that the definition of discretionary payment under Section 14 of the Holidays Act is a payment the employer is not contractually bound to pay.
In the Metropolitan case, the employer did not just label the scheme discretionary but included an express term that the payment could be denied even if the employee meets their targets. The Court of Appeal found that the payments were not guaranteed or conditional and were discretionary payments for the purposes of the Holidays Act. The payments are not required to be included in the calculation of gross earnings.
The impact of the Court of Appeal’s decision is significant. However, it should be emphasized that this decision will not be enough to simply label a payment “discretionary”. To fall within the Holidays Act definition of a discretionary payment, the employer will need to preserve the discretion not to make any payment at all whether or not any or all conditions are met by the employee.
The issue of discretionary payments is part of a wider review undertaken by the Government’s Holidays Act Taskforce which shall not be in effect until mid-2023. The Taskforce has made 22 recommendations and the government has accepted the recommendations which would include but shall not be limited to changes in the process of calculation of leave, changes in entitlement & duration of various special leaves.