New Zealand Update: Court of Appeal reverses holiday pay decision

The Court of Appeal has overturned the Employment Court’s decision in relation to whether short-term incentive (STI) payments need to be taken into account when determining an employee’s holiday pay. The Court of Appeal found that where an employer has the discretion to not pay the STI (even if the required targets/conditions are met), the STI will be discretionary, as that phrase is defined in the Holidays Act 2003, and does not have to be taken into account when calculating an employee’s holiday pay.

An employee’s holiday pay under the Holidays Act 2003 is, in part, determined by their “gross earnings”. A discretionary payment is defined by the Holidays Act 2003 as a payment that the employer is not bound, by the employee’s employment agreement, to pay the employee. Discretionary payments are excluded from gross earnings under the Holidays Act 2003.

Metropolitan Glass & Glazing Limited (Metro Glass) offered its employees a STI. The STI was set out from time to time in letters to employees. These letters made it clear that the STI was not a term and condition of the employees’ employment agreement. The STI provided for payments when certain criteria were met. Even if these criteria were met, the STI letters made it clear that any payments were totally at the discretion of Metro Glass’s Board of Directors.

The Employment Court ruled that the purpose of the gross earnings definition in the Holidays Act 2003 was to “to capture all remuneration for an employee’s job” and that the intent of the various definitions in the Act was that where productivity or incentive-based payments are made, they are part of gross earnings. The Employment Court stated that only “truly discretionary payments” (like a Christmas bonus paid at the employer’s initiative) will not be captured by gross earnings.

This was a significant decision, as up until the decision of the Employment Court, it was generally understood that schemes like Metro Glass’s were discretionary and so not included in gross earnings. The decision was significant not just because of the fact that it ran counter to the generally understood view of what a discretionary scheme was but also because of its potentially retrospective impact. Employees have up to six years to make a claim under the Holidays Act 2003 and so the decision of the Employment Court could have resulted in employers being required to make remedial payments to employees for any incentive payments made in the last six years. As these types of incentive schemes tended to operate for executives, and remedial payments would be a further 8% on top of discretionary payments already paid, these remedial payments could have been significant.

However, the Court of Appeal overturned the decision of the Employment Court and its central premise that an incentive or productivity-based payment will always be gross earnings within the meaning of the Act and can never be a discretionary payment. The Court of Appeal stated that the key is whether the payment is one that the employer is contractually bound to pay and that Metro Glass did more than just label its scheme discretionary. It included an express term that even if all of the conditions were met, it retained the discretion not to make any payment. The STI was neither guaranteed nor conditional and so was a discretionary payment for the purposes of the Holidays Act 2003.

This decision will be welcomed by many employers, who were concerned that they would have had to make retrospective payments for incentive schemes that were understood to have been outside the scope of the Holidays Act 2003. The fact that these retrospective payments would likely have been skewed towards senior and executive employees, already potentially receiving large bonuses, had also been raised as a potential concern.

While this decision provides helpful certainty in relation to discretionary bonuses and incentives there remains ongoing litigation in relation to bonuses for some types of employees, with the previous decision of the Court of Appeal in Tourism Holdings now before the Supreme Court. There is also the potential for this decision to be appealed to the Supreme Court. The Court of Appeal also seemed to indicate that an employer labeling a payment ‘discretionary’ would not be sufficient and there had to be substance to that label. It will be important for employers to review their own discretionary schemes to ensure they can rely on this decision and exclude discretionary payments from gross earnings.

This decision and the Supreme Court’s decision in the Tourism Holdings case may, going forward, become irrelevant as the Government announced in February of this year that it had accepted all of the Holidays Act Taskforce’s recommended changes to the Holidays Act 2003. One of these recommended changes was that all cash payments received, except direct reimbursements for costs incurred, would be taken into account when calculating payments for annual holidays. Employers will at least have time to prepare for and adjust their incentive payments to reflect this change. Legislation is not due to be introduced until early 2022 and the Government has signaled that it will give businesses plenty of time to prepare for the changes.

By Quigg Partners, New Zealand, a Transatlantic Law International affiliated firm.

For additional information about labor and employment law in New Zealand, contact David Quigg at newzealandlabor@transatlanticlaw.com.

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