Clarity on discretionary payments and holiday pay

Many employers will be breathing a sigh of relief today as the Court of Appeal confirmed that genuinely discretionary payments included in contractual documents can be excluded from holiday pay calculations. The Court of Appeal has overturned the Employment Court's decision that discretionary payments made by Metropolitan Glass & Glazing Ltd (Metropolitan Glass) under a Short Term Incentive Bonus Scheme (STI scheme) constituted gross earnings under the Holidays Act 2003.
 
Under the Holidays Act, "gross earnings" includes all payments the employer is required to make under the employment agreement, but excludes discretionary payments. "Discretionary payment" is defined as a payment that the employer is not bound, by the employee's employment agreement, to pay. The definition expressly excludes a payment that the employer is bound to pay even though (i) the amount is not specified in the employment agreement and the employer may determine the amount to be paid; or (ii) where payment is subject to certain conditions.
 
The Court of Appeal agreed with the Employment Court that the fact that the STI schemes were not included in the individual employment agreements did not in and of itself mean that they fell outside the definition of gross earnings. Rather, the key issue was whether Metropolitan Glass had a contractual obligation to make the payment (however that contractual obligation arose).
 
Metropolitan Glass's STI scheme contained an overall discretion whereby payment could be withheld even if the conditions were met. Because of this overarching discretion, the Court of Appeal considered payments under the STI scheme were discretionary and should not form part of the employee's gross earnings when calculating holiday pay. This was the case even though Metropolitan Glass had an obligation to exercise that discretion fairly and reasonably.
 
As submitted by Business NZ (which participated in the appeal hearing as an intervenor), had the Employment Court's finding been upheld that payments under the STI scheme were gross earnings, this could have resulted in backpay obligations amounting to hundreds of millions of dollars for New Zealand employers.
 
Employers will welcome the certainty provided by the Court of Appeal's decision. However, it should be emphasised that it 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 retain the discretion not to make any payment at all – whether or not any or all conditions are met by the employee.
 
If you would like further information on what this means for you, please get in touch with our Employment Law Team.

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