Employers sometimes use bonuses to incentivise employees, usually to assist businesses achieve their goals and objectives.  Bonuses are regularly categorised as being discretionary, which has implications as to whether they should be included in holiday pay calculations.

The recent Court of Appeal decision of Metropolitan Glass and Glazing Ltd v MBIE  has reversed the decision of the Full Bench of the Employment Court on the issue of what is a discretionary bonus for the purposes of holiday pay calculations.

Background

Metropolitan implemented discretionary bonus schemes for its employees in 2016 and 2017. The schemes were   called Short Term Incentive Bonus schemes (STIB schemes).

The terms of the STIB schemes were contained in letters Metropolitan sent to certain senior employees inviting them to participate in what the letter described as a discretionary bonus scheme. The terms the STIB stated that “[a]ny payments made under this Scheme are totally at the discretion of [Metropolitan] and there is no guarantee of any payment in any year…” and that Metropolitan had the “sole discretion not to make any payment even where the criteria in this Scheme are met.”  Further, it was able to amend, revoke or discontinue the Scheme at any time including during a fiscal year.

Metropolitan considered payments made under its STIB schemes were discretionary payments and were not required to be taken into account when calculating holiday pay.

The Holidays Act

The Holidays Act differentiates between “gross earnings” and a “discretionary payment”. If the payments made by Metropolitan under the STIB schemes came within the definition of “gross earnings” then they should have formed part of the holiday pay calculation. But if they were within the definition of “discretionary payments” then Metropolitan was correct in not taking them into account.

“Gross earnings” excludes any payments that the employer is not bound, by the terms of the employee’s employment agreement, to pay the employee, for example, any discretionary payments.

Conversely a “discretionary payment” is defined as a payment that the employer is not bound, by the employee’s employment agreement, to pay the employee. It does not include a payment that the employer is required under that employment agreement to make only if certain conditions are met.

The Court of Appeal decision

The Court of Appeal affirmed the well-established principle that a contract of employment between employer and employee may comprise terms arising from a number of different sources. The formal written employment agreement is never the entire contract of employment (though often the main source) of contractually binding terms.

The Court then stated that a discretionary payment, and what distinguishes it from gross earnings, is that it is a payment the employer is not contractually bound to make. If the employer was contractually bound to make the payment, then subject to a limited number of specified exceptions, it is gross earnings. The source of the employer’s contractual obligation is irrelevant.

The Court found it important that Metropolitan did more than just label its scheme as discretionary. It included an express term that even if all of the conditions were met, it retained the discretion not to make any payment. In doing so, the Court found that the STIB schemes retained the character of a discretionary payment for the purposes of calculating holiday pay.

Is this the end

While this is currently good news for employers, MBIE still has time to appeal the decision. Further, employers should bear in mind that the Holidays Act Taskforce recommendation (which has been accepted by the Government) is to define “gross earnings” to include all payments other than direct reimbursements. This means that, if enacted, it would have the effect of reversing the Metropolitan decision.

Watch this space for updates!