The court of appeal has overturned an employment court decision against Metro Performance Glass, which if upheld, could have cost other businesses hundreds of millions of dollars in holiday backpay.
Last year, the employment court found in favour of the Labour Inspectorate, which argued that Metro Glass had underpaid holiday pay by not appropriately recognising its short-term incentive scheme as part of employees’ gross income.
Metro Glass appealed the decision, arguing that, because the payments were discretionary and didn’t fall under any employment agreements, it had no obligation to pay them – even if performance targets were met.
The court of appeal was asked to address whether the employment court erred by concluding that payments made under the short-term scheme were classified “gross earnings” under the Holidays Act.
While agreeing with the employment court that an “employment agreement” should not be interpreted narrowly, the court of appeal disagreed with the decision to classify incentive or productivity-based payments as gross earnings under the act rather than discretionary payments.
Important distinction
Under the Holidays Act, discretionary payments are distinct from gross earnings as they are not bound by employment agreement, and are therefore not subject to holiday pay.
The court of appeal found the employment court had overlooked the fact Metro Glass had labelled its scheme discretionary, and retained the discretion not to make any payments, even if all performance targets were met.
While it said failure to exercise that discretion fairly and pay out the bonuses could still be subject to personal grievances, “in our view, being neither guaranteed nor conditional, the payment would still retain the character of a discretionary payment for the purposes of the Holidays Act”.
The decision will be welcomed by employers who have implemented similar bonus schemes. Had the employment court’s decision been upheld, businesses could have been expected to backpay six years’ worth of holiday pay, according to BusinessNZ’s employment specialist, Paul Mackay.
A “back of the envelope” calculation suggests this bill could easily be worth hundreds of millions, which would be paid largely to executive employees.
“The irony is that because discretionary pay is concentrated at the senior level, so the greatest beneficiaries of this would be at the highest levels,” he said.
According to Bell Gully, many employees have raised claims in reliance on the employment court’s decision, and will now need to be reassessed in light of the successful appeal.
