Holidays Act and discretionary bonuses

The recent judgment of the full Employment Court in Metropolitan Glass & Glazing Limited v Labour Inspector [2020] NZEmpC 39 has clarified the issue of when and in what circumstances bonuses will be contractual or discretionary for the purposes of calculating “gross earnings”.

Section 14 of the Holidays Act 2003 (Act) sets out what is captured as gross earnings and includes “productivity or incentive based payments” but excludes “discretionary payments”.

The term discretionary payments is defined in section 5 of the Act and includes a payment that the employer is not bound by the employee’s employment agreement to pay the employee. That definition was added in 2011. Since then employers have sought, by contract or by policy, to avoid their liability to include a bonus payment in any annual leave payment calculations on the grounds that they are discretionary. MBIE has, since May 2017, sought to clarify the position.

In Metropolitan, the individual employment agreements made provision for the payment of ‘discretionary’ bonuses. In order to be paid the bonus the employees’ needed to achieve agreed KPIs and/or the completion of projects on time and on budget. The invitation into the Scheme included the following statement:
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 DIFOT, Retrofit & EBIT performance targets are achieved.

The full bench of the Employment Court had little difficulty concluding that the:
payments received under the Schemes are remuneration for effort put in by the employee.

The Court also said that s14(a)(iv) of the Act “clearly contemplates” that such productivity and incentive payments are captured and that was irrespective of whether those payments:
arise out of provisions in the written individual employment agreement or from policy documents, or are contained in a separate, standalone document.

The Court also confirmed that having tied the payments to productivity targets Metropolitan Glass cannot contract out of the Act. So statements that the bonus payments do not come within the definition of “gross earnings” or are “discretionary” for the purposes of the Act “carry no legal weight”.

Finally, the Court in deciding that the payments were gross earnings confirmed:
neither the variability of the amount of the payment, nor the conditional nature of it, makes the payment a discretionary payment for the purposes of the Act.

Bonus payments will not be discretionary just because the employer gets to decide who participates in any bonus scheme, or the amount of any payment, or because they are only payable if certain conditions are met.

In summary, if an employee has to put in some effort and their effort is tied to a target/ KPI etc. in order to receive the bonus then the payment they receive is not discretionary no matter how it is structured or worded. The payment will need to be included in gross earnings for the purposes of calculating annual leave payments when the employee takes annual leave.

Only true and pure discretionary payments are excluded. These might include, for example, a one off Christmas bonus because the employer has had a good year and wants to reward the employees or the employer has secured a large client and wants to reward the team on a one off basis.

This article along with many others were included in the June edition of our Employment Newsletter.