Wellington + 64 4 496 9990
Lower Hutt + 64 4 569 4873
Masterton + 64 6 370 6480

Articles and News

Email me when new posts are made to this blog
When is a discretionary bonus not a discretionary bonus?

By Mike Gould

When is a discretionary bonus not a discretionary bonus?

4 May 2020
The Employment Court has made a decision that will affect every employer who has any kind of bonus or performance related remuneration scheme in place.

The employer, Metropolitan Glass and Glazing Ltd, put in place a bonus scheme for employees. The scheme was plainly emphasised, in writing, as being discretionary.

The letter to employees introducing the scheme stated that:

“any payments under this scheme are totally at the discretion of Metro and there is no guarantee of any payment even if performance targets are achieved.”

The written terms of the scheme repeated that any payments under it were totally at the discretion of Metro Glass and there was no guarantee of any payment in any year. The terms included the statement:

“Metro Glass has the sole discretion not to make any payment even where the criteria in this scheme are met. The scheme is not a term of your employment agreement.

Under the Holidays Act, holiday pay is based on the employee’s “gross earnings” in the previous year.

“Gross earnings” is defined as including productivity or incentive based payments, but excluding discretionary payments. Discretionary Payments are defined in the Act as payments the employer is “not bound by the employment agreement to pay”.

Metropolitan Glass, quite reasonably, maintained that as it was not bound to pay any money under the bonus scheme, any such payments were not part of the “gross earnings” of an employee for the purpose of calculating holiday pay.

The Employment Court disagreed. It ruled that even in the face of the written statements that the payments were at the discretion of Metro Glass and that there was no guarantee in any year of payment being made, the payments were not discretionary.

The Court said that Metro Glass could not avoid responsibility by simply labelling the scheme as “discretionary”. That conclusion seems strange, given that the payments were not simply “labelled” as discretionary, they were contractually agreed as being at the discretion of the employer.

While Metro Glass may appeal this decision, until any appeal is heard, discretionary bonus payments now have to be brought into the calculation of holiday pay for employees.
 

Topics: Employment