News & Thinking
Incentives and bonuses: landmark decision provides clarity
A decision by the New Zealand Court of Appeal last week has provided clarity around whether has conditional payments to employees (e.g. bonuses) must be considered part of ‘gross earnings’ when calculating holiday pay and other leave payments for employees.
The Court of Appeal has reached the decision that these payments must only be included in ‘gross earnings’ under section 14 of the Holidays Act if they are contractual and the employer has no discretion over payment. It was held that the incentive scheme payments made by the employer, Metropolitan Glass, should not be included in gross earnings because the employer had expressly stated that even if all of the conditions of the scheme were met, the employer retained the discretion not to make any payment.
The decision could still be appealed to the Supreme Court however in the meantime employers can ensure that their bonus or incentive-based schemes are worded to protect their discretion not to make any payments.
The New Zealand Court of Appeal have released their judgment for Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business, Innovation and Employment  NZCA 560 in which they reviewed the Employment Court’s decision in Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business, Innovation and Employment  NZEmpC 39. The New Zealand Court of Appeal have ruled that conditional payments can still be considered ‘discretionary’ and employers are not required to include these in the calculation of ‘gross earnings’ under the Holidays Act, provided that there is a residual discretion not to make any payment even if all of the conditions are met.
In 2016 and 2017, Metropolitan Glass implemented discretionary bonus schemes for their employees called “short term incentive bonus” (STIB) schemes. Metropolitan Glass operated as though payments under the STIB scheme were discretionary and so did not include them as ‘gross earnings’ for the purpose of calculating holiday pay under the Holidays Act. In the original Employment Court (EC) decision, the EC concluded that the company’s STIB scheme should be included in the employees’ ‘gross earnings’ for the purpose of calculating holiday pay. This was on the basis that payments made under the STIB scheme were intended to compensate employees for the effort that they had put in and were therefore conditional. Section 14 of the Holidays Act specifically states that productivity or incentive based payments are to be included as ‘gross earnings’ for the purpose of calculating holiday pay. The EC’s interpretation was that the company’s STIB scheme payments were not discretionary because they were conditional on employees meeting certain criteria (i.e. performance targets). The STIB scheme payments should therefore be considered part of ‘gross earnings’ for the purpose of calculating holiday pay and it was indicated that Metropolitan Glass would need to make remedial holiday pay payments.
What did the NZ Court of Appeal decide?
Metropolitan Glass appealed the EC’s decision and on 26 October 2021 the New Zealand Court of Appeal (NZCA) released their Judgment. The NZCA considered whether the EC had erred in its finding that payments made under the company’s STIB scheme were payments that the company was required to pay under the terms of employees’ employment agreements and found that, yes, the EC had erred. The crux of the legal issue required the NZCA to consider the statutory definitions of ‘gross earnings’ and ‘discretionary payment’ because if STIB scheme payments were discretionary, the company was correct in not including them in their gross earnings calculations.
Metropolitan Glass put forward two main arguments as to why STIB scheme payments should not be included as part of employees’ ‘gross earnings’ –
The definition of ‘gross earnings’ under the Holidays Act refers to “all payments that the employer is required to pay to the employee under the employee’s employment agreement” and Metropolitan Glass initiated the STIB Scheme with a stand-alone document. Metropolitan Glass argued that because their employees otherwise have comprehensive individual employment agreements and they had offered participation in the STIB scheme using a stand-alone document, the STIB scheme was not part of employees’ employment agreements.
The second part of the ‘gross earnings’ definition is that included payments must be those that the employer is required to make. Metropolitan Glass asserted that any payments made under the STIB scheme were wholly discretionary.
On the first argument the NZCA agreed with the EC’s assessment, that the employment agreement can be comprised of a number of instruments. Therefore, the STIB scheme payments being communicated in a stand-alone document was irrelevant because it still formed part of the terms and conditions of the employees’ relationships with Metropolitan Glass.
On the second argument, the NZCA looked at whether Metropolitan Glass had a residual discretion to make payment under the STIB scheme, even if all of the conditions were met. The key element that the NZCA focused on was that the definition of payments included in ‘gross earnings’ referred to payments that the employer is contractually bound to make. Therefore in the event that there is residual discretion, the payments should not be included in calculations for ‘gross earnings’.
As Metropolitan Glass specifically included a term in their stand-alone STIB scheme document stating that ‘even if all of the conditions were met, it [Metro Glass] retained [the] discretion not to make any payment’, the NZCA found that the STIB payments were neither guaranteed nor conditional and so retained the character of a discretionary payment for the purpose of section 14 of the Holidays Act.
What does this mean for you?
If your business has or is considering implementing an incentive based or conditional payment scheme, you should make sure that you include a written term preserving your discretion to make any payment.
If you have any questions regarding this decision and what it means for your business, please feel free to get in contact.