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Court of Appeal reverses Employment Court decision on discretionary incentive payments

Discretionary payments have been a relatively grey area for businesses, and employers have sought, by contract or by policy, to avoid their liability to include bonus payments in any annual leave payment calculations on these grounds.

In 2020 the Employment Court made a decision which found these short-term incentive payments made by Metropolitan Glass and Glazing Ltd that were conditional on meeting performance targets, should be included in holiday pay calculations and fell within the definition of ‘gross earnings’, even though the scheme was ‘discretionary’. However, this decision was recently overturned by the Court of Appeal.

The Court of Appeal stated that the Employment Court was erroneous as it overlooked the fact that the key element of the definition of “gross earnings” is that the payment must be one that the employer is contractually bound to pay. The definition of “discretionary payment” is a payment that the employer is not contractually bound to pay.

The definition of “gross earnings” under the Holidays Act includes “all payments that the employer is required to pay to the employee under the employee’s employment agreement”, but excludes “discretionary payments”. Metro Glass treated these incentive payments as “discretionary payments” and therefore, excluded the payments from holiday pay calculations.

The Employment Court found that found that any incentive scheme recorded in writing and including performance-based metrics is likely to be considered ‘non-discretionary”, whereas the Court of Appeal upheld Metro Glass’ appeal, finding that payments made under its incentive scheme were “discretionary payments” and could therefore be excluded from “gross earnings” calculations.

The CoA held that “Metropolitan … included an express term that even if all of the conditions were met, it retained the discretion not to make any payment”. They also found that the discretion would need to be exercised in good faith and a failure to do so could create grounds for personal grievance.

The Court of Appeal did agree with the Employment Court in the fact that the scheme sat in a separate document outside of the Employment Agreement was irrelevant and that the critical question was whether it was contractually binding on Metro Glass.

So, what does this mean for employers going forward?

Based on the Court of Appeal’s decision, provided employers expressly retain discretion to withhold incentive payments in any relevant incentive schemes (or similar), even if specified targets are achieved, such payments will not need to be included in “gross earnings”.

However, an incentive scheme simply reserving a discretion as to the amount to be paid or conditions to be met for payment, would not be considered discretionary. The key to discretion that employers would need to reserve is whether to make a payment at all, regardless of whether conditions for the payment have been met or not.

Something to be aware of is that this result might not hold up for much longer with the Holidays Act taskforce recommending that all cash payments made to employees be factored into holiday pay entitlements, except for direct reimbursements.

Disclaimer

This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.

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