Bonus Schemes and Holiday Pay - Welcome Clarity from Court of Appeal

The Court of Appeal has just released a long-awaited judgment giving much needed clarity to employers on the issue of whether discretionary payments should be taken into account when calculating holiday pay.

In Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business, Innovation and Employment, the Court of Appeal overturned the 2020 judgment from the full bench of the Employment Court, which applied a very narrow interpretation of what constitutes a truly discretionary payment under the Holidays Act 2003.

The Employment Court had previously found that incentive payments provided for in Metropolitan Glass' policies had contractual force and formed part of "gross earnings" for the purpose of holiday pay calculations. The impact of this was significant, and had ramifications for many employers who provide bonus or incentive payments to their employees.  The potential liability for Metropolitan Glass was also significant and included back pay. 

The Employment Court's decision created particular concern amongst employers because:

• The Metropolitan Glass bonus scheme was described as being at the discretion of the company; 
• Metropolitan Glass retained the discretion as to whether it would pay, and if so, the amount, regardless of the achievement of company and individual performance criteria; and
• Metropolitan Glass had the discretion to amend or revoke the bonus scheme at any time, including during a fiscal year.

The Court of Appeal's judgment issued on Tuesday 26th October determined that the Employment Court had made an error of law by concluding that the bonus payments fell within the definition of gross earnings under the Holidays Act.  The Court of Appeal held that:

"Metropolitan did more than just label its scheme discretionary.  It included an express term that even if all of the conditions were met, it retained the discretion not to make any payment.  It would of course be under an obligation to exercise that discretion fairly and reasonably, and a failure to do so could be grounds for a personal grievance, but in our view being neither guaranteed nor conditional the payment would still retain the character of a discretionary payment for the purposes of the Holidays Act."

The Court of Appeal also rejected an argument that its findings would enable an employer to pay 
an employee a deliberately low salary and top it up with regular so-called discretionary 
payments, resulting in lower holiday pay payments and employees being disincentivised from taking holidays. The Court of Appeal found that there was no evidence of such a practice in New Zealand.

The impact of Court of Appeal's decision is significant.  A properly worded discretionary bonus scheme (regardless of whether contained in an employment agreement or company policy) can actually work as intended, in that it is truly discretionary and therefore does not need to be included in the calculation of holiday pay.  It will still however be important to ensure bonus policies provide the requisite level of discretion, and that this discretion operates effectively in practice. 

The issue of discretionary payments is part of a wider review undertaken by the Government's Holidays Act Taskforce.  Given the Taskforce's recommendations are not likely to take effect until mid 2023, the Court of Appeal's findings given welcome clarity to employers until such time as any wider changes to the Holidays Act 2003 are made.

If you need any assistance in preparing a compliant bonus scheme, or assistance with determining the status of your bonus scheme arrangements, please contact us.