Metroglass – Court of Appeal clarifies status of discretionary bonuses

Despite the efforts of many employers over a long time to make it very clear that various performances schemes, and particularly those involving some element of discretion, do not form part of the terms and conditions of employment – it seems that the Employment Court had its own view.

In 2016 and 2017, Metroglass invited a number of senior employees to participate in a discretionary bonus scheme.  The bonus scheme was subject to conditions that were attached to performance targets.  Importantly, it was clearly stated that any payments made under the scheme were entirely discretionary – and there was no obligation to make a payment even if the targets were met.

The Labour Inspector considered the payments made under the schemes were “gross earnings” for the purposes of calculating holiday pay under the Holidays Act 2003.

The Employment Court found in favour of the Labour Inspector – and the case ended up in the Court of Appeal.

Deliberation

The question for the Court of Appeal was whether the (discretionary) payments – were ones that Metroglass was required to make to its employees under their employment agreement and therefore captured by the definition of “gross earnings” under the Holidays Act.

In getting to the (IMHO:  right) answer, the Court of Appeal considered whether an ‘employment agreement’ for the purpose of the definition of ‘gross earnings’ should be interpreted narrowly to mean only the formal written employment agreement.  The found that it will depend on the context.

Under the Holidays Act the essential difference between a discretionary payment and gross earnings is whether the employer is contractually bound to pay.  If a contractual obligation exists, the source of the obligation is irrelevant.  As a result, the fact the bonus scheme was in a standalone letter and not the (formal) employment did not, alone, make any payments discretionary.

But the Court of Appeal disagreed with that incentive or productivity based payments will always be gross earnings under the Holidays Act and can never be discretionary.  This was a matter of statutory interpretation – because the Employment Court appeared to overlook the key element in the definition of gross earnings (i.e. that the employer must be contractually bound to pay).  Although Metroglass had a duty to exercise its discretion fairly and reasonably, the fact that payment was neither conditional nor guaranteed meant it retained its character as a discretionary payment under the Holidays Act.

Result

Consequently, the Court of Appeal found the Employment Court was wrong to find the payments were gross earnings – and to be included in the calculation of holiday pay entitlements.

Comments

Alarmingly, Business NZ participated in the appeal and commented that had, the Employment Court’s finding been upheld, it could have cost employers hundreds of millions of dollars in back pay.

Whilst the Court of Appeal decision marks a return to what the position has been understood to be in respect of discretionary payments, some effort is required to make certain that there is no contractual entitlement.  Simply labelling a scheme as ‘discretionary’ won’t be enough.  To be sure, that a payment is discretionary, the employer needs to retain the discretion not to make any payment at all – whether or not any or all the targets are met.

Alarmingly, the Labour Inspector submitted that, upholding the appeal and returning to what has been understood to be the positon for some time, would enable employers to pay a deliberately low salary, topped up with regular ‘discretionary’ payments – in order to escape holiday pay obligations and disincentivise employees from taking holidays.  Thankfully, the Court of Appeal commented that such an extreme example, without any supporting evidence, cannot detract from the correct interpretation of existing provisions.

Finally, the Government has accepted the recommendations of the Holidays Act Taskforce, to change the definition of ‘gross earnings’ to mean all cash payments an employee receives (except reimbursements for out-of-pocket expenses).  Legislation is expected next year.

Further information

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