New Zealand's Court of Appeal has released a much-anticipated ruling, stating payments made by an employer under its short-term incentive (STI) schemes to employees were discretionary payments and should not be included in holiday pay calculations.

Under New Zealand's Holidays Act, holiday pay is calculated based on an employee's 'gross earnings'. The statutory definition of 'gross earnings', contained in s14 of the Holidays Act, includes any 'productivity or incentive-based payments' but expressly excludes 'any discretionary payments'.

Payments included in gross earnings will affect holiday pay to the employee's advantage.

This dispute arose about whether payments under an employer's Short-Term Incentive Bonus (STIB) scheme, which were described to be at the Board's absolute discretion, in fact acted as productivity or incentive-based payments and therefore should have formed a part of employees' gross earnings for the purposes of calculating holiday pay.

The Employment Court concluded that the STIB payments were not discretionary and therefore were part of gross earnings. This decision was based on the Employment Court's finding that the parties had intended the STIB schemes to have contractual force, as the STIB schemes were put in place to incentivise employees to meet key deliverable targets.

On appeal, the Court of Appeal emphasised that the definition of discretionary payment under s14 of the Holidays Act is a payment the employer is not contractually bound to pay.

In this case, the employer did not just label the scheme discretionary but included an express term that the payment could be withheld even if targets were met. Therefore, the Court of Appeal found that the payments were not guaranteed or conditional and were discretionary payments for the purposes of the Holidays Act. The payments did not need to be included in the calculation of gross earnings.

This decision is significant for all employers operating bonus schemes in New Zealand, particularly where the employer relies on the 'discretionary payments' exception under the Holidays Act in not including those payments in holiday pay calculations.

Business New Zealand (the peak body representing New Zealand business and employers) appeared as an intervener in the proceedings and made submissions related to the wider ramifications and consequences for business.

A full copy of the judgment can be found here.

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