Holiday Pay & Bonus Schemes –– Dukesons Business Law – Employment Lawyer – Business Lawyer

May 2020

This Blog isn't legal advice – if you need legal advice on any employment law issue, please contact me. I'm business lawyer (commercial lawyer) in Auckland who provides advice on a wide range of business law including employment law issues.

A recent Employment Court decision has narrowed the scope of bonus schemes that would be deemed to involve discretionary payments for the purposes of calculating holiday pay. The correctness of the decision is doubted by some employment lawyers.

I don’t usually get inquiries from clients at the nitty gritty end of payroll matters – much of that information is available publicly, without charge. But the Employment Court decision is important for employers who, up until now, have considered that they operate a truly discretionary bonus scheme, which would be irrelevant to the calculation of holiday pay.

Under the Holidays Act, productivity or incentive-based payments must be be taken into account when calculating holiday pay. Excluded are payments that the employer isn’t bound, by the terms of the employee’s employment agreement, to pay the employee e.g. discretionary payments.

In the Metropolitan Glass and Glazing case, the bonus scheme provided that:

Any payments made under this Scheme are totally at the discretion of [the Company] and there is no guarantee of any payment in any year. [The Company ] 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.

Metropolitan Glass was able to amend, revoke or discontinue the Scheme at any time at its sole discretion, including during a fiscal year.

The Employment Court said:

The inclusion of productivity and incentive payments in s 14(a)(iv) [of the Holidays Act] clearly contemplates that such payments are captured.

The Court contrasted the scheme to a “truly gratuitous payment”, like a Christmas bonus paid at the employer’s initiative, which it said would be truly discretionary.

Given that the scheme wasn’t a truly discretionary scheme, payments under it had to be factored into the calculation of holiday pay.

The Court also held, correctly in my view, that despite the wording of the scheme, it was clearly a term of the employment agreement between the parties, even though not set out in the actual written agreement.

Finally, the Court considered that Metropolitan Glass had fallen foul of the annual close down rules in relation to its treatment of annual holidays during closedown period.

Metropolitan Glass allowed employees with no annual holiday entitlement to take leave in advance, rather than paying 8% of their gross earnings as at the closedown date. The Court acknowledged that the law wasn’t entirely clear but decided that Metropolitan had failed to pay employees correctly - employees with no annual holiday entitlement must be paid 8% of their gross earnings as at the closedown date. They could agree to take holidays in advance in addition to that payment, but not as an alternative to that payment.

That aspect of the decision may also be questionable.

Employment law still manages to produce a steady stream of developments that will keep employers and employment lawyers on their toes.

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