The Court of Appeal recently released a decision Metropolitan Glass & Glazing Limited v Labour Inspector Ministry of Business, Innovation and Employment  NZCA 560 reversing an earlier ruling of the Employment Court regarding short-term incentive payments under the Holidays Act 2003.
The employer, Metropolitan Glass & Glazing Limited (Metropolitan Glass), sent out a letter in 2016 and a subsequent letter in 2017 inviting certain employees to join a short-term incentive scheme ("STI scheme"). The STI scheme was set out in a separate document from any employment agreements and noted that any payments under the scheme would be at the discretion of Metropolitan Glass and there would be no guaranteed payments even if employees reached the targets indicated.
Metropolitan Glass treated the STI payments as discretionary payments and therefore excluded the payments from the holiday pay calculations.
The definition of "gross earnings" under the Holidays Act includes all payments that the employer is required to pay to an employee under the employee's employment agreement but it excludes discretionary payment. "Discretionary payment" is defined as a payment that the employer is not bound, by the employee's employment agreement, to pay.
The STI scheme provided that any payments made under the STI scheme were at the discretion of Metropolitan Glass even if the criteria for the STI scheme was met. The Labour Inspector argued that any payments made under the scheme were to be included in the calculation of "gross earnings" for the receiving employee.
In short, the Employment Court found that payments under the STI scheme were not discretionary and therefore, should be included in gross earnings. On coming to its conclusion, the Court stated that payments under the STI scheme were "remuneration for effort put in by the employee" and that under the Holiday's Act, incentive payments are included in the definition of "gross earnings".
Court of Appeal
The Court of Appeal upheld the appeal, finding that where short-term incentive schemes reserve discretion for an employer not to make payment, those incentive payments are discretionary under the Holidays Act. As a result, STI payments do not form part of "gross earnings" which annual holidays are calculated from.
On coming to its decision, the Court of Appeal found the Employment Court erred in its decision in failing to consider that employers are contractually bound to pay "gross earnings" whereas, discretionary payments are just that. Not contractually binding and are at the discretion of the employer.
Take Home Tips
For now, provided an employer retains the discretion to pay or withhold an incentive payment, the payment will not need to be included in the calculation of "gross earnings". However, one of the recommendations made by the Holidays Act taskforce to be implemented in 2022 is that all earnings will be factored into holiday pay. We will keep you updated as the matter progresses.
Please direct any enquiries to:
See our Expertise page
Written by Melissa Johnston and Olivia Faulds
© McVeagh Fleming 2021
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.