Update to bonus (incentive) payments and clarity on the treatment of regular pay

There have been two important updates which affect the application of the Holidays Act 2003 and the delivery of holiday pay by employers to employees in recent weeks.

It is important that employers and in particular payroll teams are across these updates to ensure that the correct amount of holiday pay is calculated for employees, especially in the lead up to New Zealand’s traditional holiday season.

The Ministry of Business and Innovation and Employment has chosen not to appeal the decision of the Court of Appeal in the case of Metropolitan Glass & Glazing Limited  to the Supreme Court.

The date for appeal passed on Friday 27 November 2021.

This means that the position is now settled that bonus schemes which reserve the discretion of the employer to make no payment, even where KPI targets and/or specified conditions are met, can potentially be considered discretionary payments and therefore excluded from gross earnings.

Impact and next steps

Organisations will need to consider the impact of the ruling on their current payroll which may include performing a review of bonus policy schemes and historical remediation where non-compliance has been established.

Organisations that have included a liability provision relating to Holidays Act 2003 remediation will also need to consider whether the provision needs to be adjusted to exclude estimated under-payments resulting from discretionary bonus payments.

For further details of the decision or the impact to your organisation, please get in touch.

The Supreme Court released its judgment in Tourism Holdings Ltd v A Labour Inspector of the Ministry of Business, Innovation and Employment in November 2021.

The decision focused on the definition of “regular” and what payments should be included when calculating employees’ holiday pay, specifically when calculating Ordinary Weekly Pay.

Ruling

When employees take annual holidays they must be paid the greater of their Ordinary Weekly Pay (OWP) and their Average Weekly Earnings (AWE). OWP means the amount the employee receives under their employment agreement for an ordinary working week. If it is not possible to determine an employee’s OWP there is a formula that is to be used, commonly referred to as OWP2.

OWP2 takes into account regular salary and income payments, however, it specifically excludes productivity or incentive payments that are not a regular part of an employee’s pay.

In this case, Tourism Holdings excluded commission payments from the formula in OWP2 as they believed commission payments didn’t make up the affected employee’s pay for an ordinary week.

At the Court of Appeal, it was previously held that payments are 'a regular part of an employee’s pay' if they are made either:

• substantively regularly, being made systematically and according to rules; or
• temporally regularly, being made uniformly in time and manner.  

The Court of Appeal’s decision significantly broadened the scope of a "regular” payment". 

It was a long road to get the final outcome, but the Supreme Court decision now provides clarity for organisations as to what is "regular" for the purposes of calculating of OWP2.

• Payments that are made weekly, fortnightly or monthly should be included in OWP2, unless specifically excluded e.g a cost reimbursement.

• Payments to employees that are Quarterly or Annual should generally be excluded on the basis that they aren’t paid on a four week/monthly regular basis.

Note that the inclusion of these payments in Gross Earnings and the Average Weekly Earnings calculation is a different consideration all together.

Impact and next steps

Organisations will need to consider payments they have been excluding and including in OWP2 calculations for employees who have a variable work pattern.

There is a risk that employers could be providing insufficient holiday pay for employees by excluding regular payments or paying employees more than they are entitled to by incorrectly including irregular payments in the OWP2 calculation.   

When considering these payments it would be a good idea to check the configuration of those payments/allowances in the payroll system as well.

We would be happy to discuss the implications of the judgment on your organisation.

If you have any further questions on this please contact Rebecca Armour or Mosh Hilal.