The Full Employment Court recently considered the issue of what is a “discretionary payment” under the Holidays Act 2003. This issue is important for whether such payments should be taken into account for holiday pay calculations. The case is Metropolitan Glass & Glazing Ltd v Labour Inspector  NZEmpC 39.
Metropolitan Glass & Glazing Limited (“Metro Glass”) operated a Short Term Incentive scheme. The scheme was not referred to in its employment agreements.
Employees of Metro Glass who were eligible for the scheme were invited by letter to join the scheme. The letter set out a number of performance targets which, if met, would lead to potential payments.
The letter described the scheme as a “discretionary bonus scheme”. Payments were to be “totally at the discretion of Metro’s Board of Directors, and there [was] no guarantee of payment” even if the various performance targets were met. The letter also recorded: Metro Glass’s right to “amend, revoke, or discontinue” the scheme at any time; it was “not a term and condition of the employment agreement”; and also said any bonus payments made “did not fall within the definition of gross earnings under the Act”.
In deciding whether payments made under the scheme fell within the definition of “gross earnings” under the Act, a number of issues were considered by the Court.
First, the Court held that it was reasonable to infer that the terms of the scheme had contractual force. This was because among other things the scheme was put in place to incentivise employees to meet key deliverable targets, and payment was based on meeting those targets. The scheme was therefore incorporated into employment agreements as a result.
Secondly, the Court also concluded that productivity and incentive payments are captured within “gross earnings” whether those payments arise out of a written employment agreement, from policy documents, or are contained in separate, standalone documents.
Finally, the Court considered whether payments were truly “discretionary” in any case. Such payments are not “discretionary” simply because the amount of payment is determined by the employer, or because they are only payable if certain conditions are met. The Court found that the various labels that Metro Glass attributed to the scheme to the effect that it was discretionary effectively had no weight.
The case is a reminder that simply labelling a payment as “discretionary” does not mean that it will be treated in that way for Holidays Act purposes. How a scheme is designed, and how payments are calculated and paid, will largely determine whether or not it is “discretionary” and whether payments made under it are part of gross earnings. Failure to account for such payments risks incorrect Holidays Act calculations being made, as well as exposure to penalties.