Discretionary Bonus Payments - a significant win for employers

On 26 October 2021, the Court of Appeal released their decision Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business and Innovation and Employment which overturned the previous employment court decision.

The original Employment Court decision

The Employment Court on 14 April 2020, ruled that the short term incentive bonus payments made by Metropolitan Glass & Glazing Limited to its employees were “gross earnings” under the Holidays Act 2003 (the ‘HA’) and therefore formed part of the employee’s holiday pay calculation.

Many employers were concerned by the employment court’s decision as, if left to stand, it would likely result in “backpay obligations amounting to hundreds of millions of dollars for New Zealand employers” who had believed they were acting lawfully and in accordance with the Holidays Act. The Court of Appeal’s decision was therefore highly anticipated.

The Court of Appeal found that the bonus payments were discretionary payments and not included as gross earnings.

Definition of gross earnings

Gross earnings is defined by the Holidays Act as meaning “all payments that the employer is required to pay… [and] excludes any payments that the employer is not bound [to pay]… for example – any discretionary payments”. The CA determined that the key element of the definition is that the payment at issue must be one which the employer is contractually bound to pay. This would include being bound to pay where conditions or targets are met by the employee.

Discretionary payment

The CA found that the employer 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. As such, the Court found that the payments retained the character of a discretionary payment for the purposes of the HA.

What employers need to do

The take home message for all employers operating bonus schemes is that it is time you reviewed the terms and conditions of your incentive schemes to ensure that any payments are expressed as being truly discretionary, including that those payments may be withheld, even if goals or targets are met by the employee.

If you have any questions about bonus schemes, please get in contact with one of our friendly employment team.