Employers will have breathed a collective sigh of relief yesterday as the Court of Appeal has provided much needed certainty on the holiday pay treatment of discretionary bonus and incentive payments.

The Court of Appeal (CA) yesterday released its decision Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business and Innovation and Employment.[1]

The CA has allowed Metropolitan Glass’ appeal, finding that its incentive scheme was discretionary and that bonus/incentive payments could therefore be excluded from holiday pay calculations.

This is welcome news, after 18 months of uncertainty for employers in already uncertain times, following the narrow interpretation taken by a full bench of the Employment Court in April 2020.

The Employment Court decision could have seen a significant and unexpected cost for many businesses and a windfall for some executives. However, the CA has found that incentive payments made under Metropolitan Glass’ Short Term Incentive Scheme (STI Scheme) were discretionary payments and therefore do not fall within the definition of “gross earnings” under section 14 of the Holidays Act 2003.

The terms the STI Scheme stated that “[a]ny payments made under this Scheme are totally at the discretion of [Metropolitan Glass] and there is no guarantee of any payment in any year...”  and that Metropolitan Glass had the “sole discretion not to make any payment even where the criteria in this Scheme are met."  Further, it was able to amend, revoke or discontinue the Scheme at any time including during a fiscal year.

In these circumstances, the CA found that Metropolitan Glass had done more than just label its scheme discretionary and that there was no contractual requirement to pay.

Another issue on appeal was whether the STI Scheme formed part of the employment agreement (as defined in section 14 of the Holidays Act 2003) as the STI Scheme was not referred to in staff individual employment agreements. The CA agreed with the EC that the STI Schemes formed part of the employment agreements and held that, “…the mere fact the [STI Scheme] were in separate documents to the individual employment agreements does not of itself take them outside the category of gross earnings.”

Comment

This decision restores the common understanding of what constitutes a “discretionary payment” since that definition was introduced in the Holidays Act in 2010. The key question, based on the CA judgment will be whether, under a particular scheme/employment agreement, there is a requirement to pay.

Employers will need to assess whether their incentive schemes operate in a discretionary way similar to the Metropolitan Glass scheme and we would be happy to advise on this.

This case also reinforces the broader need for the Holidays Act reform to be prioritised. The Holidays Act has long been a longstanding source of complexity and confusion for both employers and employees, as has been demonstrated recently by Holidays Act cases ending up before both the Court of Appeal and Supreme Court[2]. The current anticipated timeline of introduction of a bill next year and new legislation coming into effect in 2024 is too long.

Employers should also bear in mind that the Holidays Act Taskforce recommendation (which has been accepted by the Government) is to define “gross earnings” to include all payments other than direct reimbursements. This means that, if enacted, it would have the effect of reversing the Metro Glass decision and employers would need to reconsider how they structure and cost their incentive and bonus schemes. We would be happy to assist in preparing submissions to the Select Committee on this when the time comes.

Next steps/Get in touch

We hope that this is the last instalment in this litigation, providing much needed certainty to employers. However, Ministry of Business Innovation & Employment has a right to lodge any application for leave to appeal with the Supreme Court by 23 November 2021. We will keep you updated if we hear anything further in this regard. In the meantime, please contact one of our team if you would like to discuss the implications of this decision for your business.

[1] Metropolitian Glass & Glazing Limited v Labour Inspector, Ministry of Business and Innovation and Employment [2021] NZCA 560