In another blow for employers, the Employment Court has adopted a narrow interpretation of ‘discretionary payments’ in its decision on the holiday pay treatment of incentive payments in the Metro Glass case.[1].

Background

The Full Court of the Employment Court has released its long-awaited decision on the holiday pay treatment of bonus/incentive payments in Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business and Innovation and Employment [2020] NZEmpC 39. At a time when businesses are already facing financial challenges due to Covid-19, this decision could lead to increased costs for many employers due to the Court finding that discretionary incentive arrangements in policy documents can form part of ‘gross earnings’ for holiday pay.

This case concerned payments made under Metropolitan Glass’ Short Term Incentive Schemes. The STI Schemes were not referred to in Metropolitan Glass’ employment agreements. Rather, the terms were set out in letters to employees. Those letters detailed targets for employees, but also included the following wording:

“Any payments made under this Scheme are totally at the discretion of [Metropolitan Glass] and there is no guarantee of any payment in any year. [Metropolitan Glass] has the sole discretion not to make any payment even where the criteria in this Scheme are met. This Scheme is not a term and condition of your employment agreement”.

The following was also a feature of the scheme: “Metropolitan Glass may choose to make, or not make, payments under the STI Scheme at its discretion. Metropolitan Glass also was able to amend, revoke or discontinue the STI Scheme at any time at its sole discretion, including during a fiscal year”.

Court decision

Metropolitan Glass claimed that the STI payments did not attract holiday pay because they were ‘discretionary payments’, expressly excluded from the definition of gross earnings under section 14(b)(i) of the Holidays Act 2003. However, the Full Court disagreed, finding that:

“…at least in the context of s 14, we do not accept the narrow approach argued by Metropolitan Glass can have been intended. The inclusion of productivity and incentive payments in s 14(a)(iv) clearly contemplates that such payments are captured. That is so whether those payments arise out of provisions in the written individual employment agreement or from policy documents, or are contained in a separate, standalone document.” (Our emphasis)

The Court also considered it relevant that, in 2017, employees had agreed to an extension to their contractual restraints of trade in exchange for their acceptance into the STI Scheme. The Court stated that “it can be inferred that the Schemes were intended to have contractual force.”

Comment

In our view, the Full Court has adopted a very narrow definition of “discretionary payments” and as an example of a genuine discretionary payment, the Court referred to an employer “of its own initiative” deciding “to pay a Christmas bonus”. However, each case would still need to be assessed on its particular facts and it may still be possible for a different employer to show that their bonus scheme was not “intended to have contractual force.”

The final report of the Holidays Act Taskforce is due to be released any day now (with recommendations on how to address the well-documented issues and complexities associated with the Holidays Act). It is timely that this Court decision has been issued before the Taskforce report is released and we urge the Taskforce to consider the ramifications (and unintended consequences) of this decision for many NZ employers and include recommendations to deal with discretionary payments under the Holidays Act.

Next steps/Get in touch

It is unclear as to whether Metropolitan Glass intends to appeal the Full Court’s decision. In our view, there are important questions of law and significant public interest in this matter, given the potentially widespread adverse implications of this decision for many employers.

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.