Short term incentive and bonus payments (STI) are common among New Zealand businesses. In Metropolitan Glass, the Employment Court was asked to consider whether the STI were “discretionary payments” or “gross earnings” under the Holidays Act 2003.
This distinction is important. The Holidays Act defines “discretionary payments” as payments the employer is not bound by the ‘employment agreement’ to make. These payments are excluded from the definition of “gross earnings”, meaning discretionary payments are not required to be taken into account when calculating holiday pay. In this context, ‘employment agreement’ is given a wide definition – it includes not only the signed agreement, but letters of offer and the employer’s policy documents.
Therefore, if the STI were “discretionary payments”, they would not need to be included in holiday pay calculations, reducing the amount of holiday pay payable to employees. This was the approach the employer, Metropolitan Glass had been taking in this case. However, if the STI payments were held to be “gross earnings”, those payments would need to be included in the holiday pay calculations.
Metropolitan Glass’ STI scheme was a stand-alone document, not addressed in the written individual employment agreements. Express wording in the STI scheme terms stated:
“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”; and
“This scheme is not a term and condition of your employment agreement”.
The wording also reserved Metropolitan Glass’ right to amend, revoke or discontinue the STI scheme at any time. In this case, the Court decided that the ‘reality’ of the situation was that the STI scheme was put in place to incentivise employees to meet deliverable targets. The Court noted that in exchange for entry into the Scheme, the employees agreed to an extension of their restraints of trade, which the Court inferred to mean that the STI Scheme was intended to have contractual force. This makes it clear that ultimately, the ‘reality’ of contractual employment arrangements are what matters, rather than the particular wording of the agreements.
The Court ultimately decided that the STI payments could not be considered “discretionary” for the purposes of the Holidays Act; and should have been included as part of the employees’ “gross earnings” and therefore part of their holiday pay calculations.
The Court highlighted that payments under Metropolitan Glass’ STI scheme were “remuneration for effort put in by the employee” and the Holidays Act expressly states that productivity and incentive payments fall under the definition of “gross earnings”. It held that making STI payments conditional on several factors (for example meeting performance targets) does not make the payment a “discretionary payment” under the Holidays Act.
Some commentators have expressed their surprise at this decision, which took a significantly narrower approach to “discretionary payments” than previous determinations in the Employment Relations Authority. This decision will likely have a major impact for many employers who utilise a similar STI or other bonus scheme.
This decision has been appealed to the Court of Appeal. Our employment team will publish updates on this case and any developments as it progresses. In the meantime, employers should take a cautious approach when calculating holiday pay and seek specific advice.
For more information, or for specialist advice on any employment issues, please contact a member of our employment team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.