Employment Court decision finds discretionary incentive payments must be included in holiday pay calculations

15 May 2020

The Employment Court has adopted a surprisingly narrow interpretation of “discretionary payment" in considering whether an employer's discretionary short-term incentive payments should be included in holiday pay calculations under the Holidays Act 2003. 

This decision has potentially significant implications for a number of other New Zealand employers that operate similar schemes.

In Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business and Innovation and Employment [2020] NZEmpC 39, a Full Bench of the Employment Court was asked for the first time to consider whether payments under the employer's discretionary short term incentive (STI) scheme fell within the definition of “gross earnings"1 for the purposes of calculating holiday pay under the Holidays Act.

If the Court considered that the company's STI payments did meet the definition of gross earnings, these payments would need to be included in certain holiday pay calculations under the Holidays Act and this would, in turn, increase the amount payable by the company to employees for any holidays taken.

However, if the Court decided that the company's STI payments met the definition of a “discretionary payment" under the Holidays Act, then these payments could be excluded from gross earnings based holiday pay calculations, given that the definition of gross earnings under the Holidays Act excludes “discretionary payments". Prior to this decision, the company had taken this approach and excluded STI payments from gross earnings.

The discretionary STI payments at issue

Metropolitan Glass' STI schemes were set out in standalone documents and not addressed in any employment agreements. Additionally, discretionary wording was clearly included within the STI scheme terms, including express statements that:

  • “Any payments made under this Scheme are totally at the discretion of Metro's Board of Directors and there is no guarantee of any payment even if the […] performance targets are achieved."
  • “This Scheme is not a term and condition of your employment agreement."
  • “[The STI Scheme] is completely discretionary and [Metropolitan Glass] can at its sole discretion decide not [to] make any payment under this scheme, or amend, revoke or discontinue this Scheme at any time."

However, the STI scheme documents also included specific detail on how STI payments would be assessed, including the deliverable targets that the employee needed to achieve (and the weighting of those targets) for payment purposes, and the basis on which payments would be calculated (being a percentage of the employee's base salary). Additionally, the STI scheme for 2017 was offered to employees in consideration for employees agreeing to extend the scope of the restraint of trade provisions set out in their employment agreements (implying that the STI scheme was intended as a contractual benefit).

The Employment Court's decision

The Employment Court ultimately found that payments under the STI schemes were not “discretionary payments" under the Holidays Act and therefore should have been included in gross earnings.

In making this finding, the Court highlighted that:

  • Payments under the employer's STI scheme were “remuneration for effort put in by the employee" and the Holidays Act expressly contemplates that productivity and incentive payments are captured under the definition of gross earnings.
  • A productivity or incentive payment that is conditional on several factors (e.g. performance targets being met), including Board approval, will not make the payment a “discretionary payment" under the Holidays Act.

Practical implications for employers

This is the first decision of the Employment Court which has involved any detailed consideration of the definition of “discretionary payment" in the Holidays Act. It is likely to have significant implications for many employers, which may have adopted the same practice as Metropolitan Glass (i.e. excluding STI payments from gross earnings), based on similar statements about the intention for their schemes to be discretionary in nature.

When compared to the previous determinations of the Employment Relations Authority on this issue, the Employment Court has taken a different and considerably narrower approach to analysing whether incentive payments are “discretionary payments" under the Holidays Act.

In our view, the Court's decision does not fully explore the implications of an employer's express reservation of discretion about whether or not it will award incentive payments, when assessing whether any incentive payments are “discretionary payments" under the Holidays Act. Rather, it appears that if payments made under any form of documented scheme are intended to be reward for performance or effort by an employee, there is a high likelihood that these will not be “discretionary payments".

We consider that there is a reasonable possibility that the decision could be overturned should the case be appealed in the Court of Appeal. However, unless that occurs, the Employment Court's narrow interpretation of a “discretionary payment" will apply under the Holidays Act. ​

In the meantime, we recommend that employers keep up to date with any developments in Metropolitan Glass & Glazing Limited, and consider whether their incentive schemes share characteristics with those analysed by the Employment Court in this case.

Our employment team are closely following this case, and will publish updates on developments as they arise.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.

1 “Gross earnings" is defined in summary form under the Holidays Act as “all payments that the employer is required to pay to the employee under the employee's employment agreement".

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.