The full bench of the Employment Court in Metropolitan Glass & Glazing Limited v Labour Inspector recently assessed whether certain discretionary incentive payments form part of an employee’s gross earnings under the Holidays Act (“Act”). The meaning of ‘gross earnings’ underlies a number of calculations under the Holidays Act. As such, it is vital to ensure that ‘gross earnings’ is calculated correctly, as it could affect employees’ entitlements under the Act.
STI scheme and payment
Metropolitan Glass (“MG”) expressly described the short-term incentive (“STI”) scheme in its documentation as a ‘discretionary bonus scheme’. The terms of the STI scheme were aligned to the achievement of 3 key deliverable targets – the EBIT target 75% weighting, retrofit sales revenue 12.5% weighting and DIFOT – 12.5% weighting.
The terms of the STI scheme also provided that any payments were made at the discretion of MG’s Board of Directors, and that there was no guarantee of any payment, even if the 3 key deliverable performance targets were achieved. Specifically, the terms and conditions of the STI scheme included the following:
“Any payments made under this Scheme are totally at the discretion of [Metropolitan Glass] and there is no guarantee of any payment in any year. [Metropolitan Glass] has the sole discretion not to make any payment even where the criteria in this Scheme are met. This Scheme is not a term and condition of your employment agreement.”
Further, the STI scheme gave examples of situations where MG could exercise its discretion to change the terms of the STI scheme, and/or not make any payments, even when criteria were met. This included situations where the employee had been subject to disciplinary action, involved in a significant Health & Safety incident, or his/her performance had been appraised as ‘needs improvement’.
Section 14 of the Act provides that ‘gross earnings’ “means all payments that the employer is required to pay to the employee under the employee’s employment agreement”. Among other things, this includes “productivity or incentive-based payments (including commission)”.
The meaning of ‘gross earnings’ expressly excludes “any payments that the employer is not bound, by the terms of the employee’s employment agreement, to pay the employee” such as “any discretionary payments”. Section 5 defines ‘discretionary payment’ as “a payment that the employer is not bound, by the employee’s employment agreement, to pay the employee”, but excludes a “payment that the employer is bound, by the employee’s employment agreement, to pay the employee,” even though the payment may be variable or conditional.
First, MG argued that the STI bonus was not a payment that it was required to pay under any employee’s employment agreement, and that the term ‘employment agreement’ ought to be interpreted narrowly to mean the written employment agreement. The Court rejected this argument, referring to case law which provides that policies or schemes can be incorporated into an employee’s employment agreement, where the policy or scheme is intended to have contractual force.
Secondly, MG argued that the STI scheme expressly stated that no payment was required to be made. As such, it was argued that any STI payments were ‘discretionary payments’, and therefore excluded from ‘gross earnings’ under the Act. The Court also rejected this argument and considered that the purpose of section 14 is to capture all remuneration for an employee’s work under ‘gross earnings’.
Thirdly, the Court noted that the definition of ‘discretionary payment’ in section 5 excludes any payments which the employer is required to pay to the employee, even though the amount to be paid may be determined by the employer, or it is only payable if certain conditions have been met. In other words, the Court recognised that discretionary payments are conceptually distinct from a ‘variable payment’ or a ‘conditional payment’.
The Court found that the payments under MG’s STI Schemes provided an incentive for performance and were tied to productivity targets. As such, the Court considered payments were properly characterised as “productivity or incentive-based payments”, and therefore ought to form part of the employee’s ‘gross earnings’.
Further, the Court considered that the STI scheme was not truly discretionary. Rather, the amount to be paid was guided by formula and determined by MG, and payments were conditional on factors relating to company performance and approval by the Board.
The Court ultimately concluded that the variability of the amount, and the conditional nature of the payments did not render the STI payments a ‘discretionary payment’ for the purposes of the Act.
The Employment Court has given a broad interpretation to ‘gross earnings’ and to ‘productivity or incentive-based payments’. By contrast, it has given a narrow interpretation to ‘discretionary payments’, which is now confined to truly gratuitous payments. For example, where an employer decides to pay a Christmas bonus to an employee, on its own initiative.
The Court of Appeal has recently granted MG leave to appeal the Employment Court decision.
The appeal will address whether the Employment Court was wrong in law to conclude that MG’s STI payments were “payments that the employer is required to pay to the employee under the employee’s employment agreement,” and which fell within the definition of ‘gross earnings’ under the Act.
The meaning of ‘gross earnings’ is pivotal for multiple calculations that are used to determine payments for entitlements under the Act. Further, the decision may trigger claims for backpay from many employees who have received incentive payments in the last six years, which may not have been included in their ‘gross earnings’ when calculating entitlements under the Act.
Any appellate decision could have major implications for all employers in New Zealand.