Holiday pay calculation to include bonus scheme payments…

The Employment Court has found an employer liable to include bonus payments to employees in total remuneration when calculating holiday pay.

Holiday pay is calculated on gross earnings, being the greater of the earnings at the time the annual leave is taken or the average over 12 months.  The issue for the Court in this case though was whether a payment under a bonus scheme fell within the definition of gross earnings.

There is an exemption from gross earnings for discretionary payments that an employer is not obliged to pay an employee.  In this case the employer had called its bonus scheme a discretionary payment and had specifically said that any payment under it was not to be included in the calculation of gross earnings.

The Court decided, however, that the discretionary payment exemption in the Holidays Act applies only to a payment which is truly discretionary, for example, a gift given at Christmas time by the employer that it has no obligation to do and that would include a monetary gift.  In this case the “discretionary” payment was referred to in the employment agreement and was said to be in exchange for a longer restraint of trade period.  The Court held that it was therefore a contractual obligation and not a discretionary payment.

The outcome of the case, therefore, is that if you want to maintain a payment to employees as being truly discretionary, it should not be in the employment agreement, there should be no formula for working out what a discretionary payment should be, it should not be based on any performance issues and it should not be in exchange for any promise by the employee.

In this case the employer will now have to calculate annual leave based on the salary plus bonus.  The employees will therefore receive a higher rate of annual leave pay with the bonus taken into account.




Alan Knowsley
Employment Lawyer
Wellington