New guidance on discretionary payments under the Holidays Act 2003
The Holidays Act 2003 (HA) sets out that employers must take into account ‘gross earnings’ when calculating payments for holidays. Gross earnings are defined under Section 14(a) of the Act as “all payments that the employer is required to pay to the employee under the employee’s employment agreement.” The legislation expressly states that these payments include productivity or incentive-based payments, but excludes any discretionary payments.
In Metropolitan Glass & Glazing Ltd v Labour Inspector, there was a dispute over the employer’s Short-Term Incentive Bonus Scheme. This scheme meant that if employees met all three performance targets, they would be eligible for a bonus. The employer indicated in their policy that the payments were discretionary, “any payments are totally at the discretion of Metropolitan and there is no guarantee of any payment in any year.” Based on this policy, the employer did not include any bonuses in the calculation of an employee’s gross earnings. The Employment Court ruled that because the parties intended that the scheme had contractual force, the bonus payments were not discretionary and should be included in calculations for gross earnings.
This decision was recently considered in the Court of Appeal where they held a different view on the bonus payment scheme that Metropolitan offered. It was held that when drawing the line between whether a payment is discretionary or not, you must consider whether the employer is bound by a contract to make the payment. The Court held that where there are conditional payments that an employer must make if certain conditions are met, these payments are not discretionary and are to be included in the gross earnings calculation. However, the Court found that Metropolitan’s payments under their bonus scheme were entirely discretionary. The policy around the payments labelled them as discretionary and also stated that there was no guarantee as to whether they would be paid out if the employee met their targets. It was clear that Metropolitan retained the discretion to not pay the bonus even if the targets had been met. Therefore, the Court overturned the decision of the Employment Court and concluded that the employer was correct in excluding the bonus payments from calculations of gross earnings. This decision will help provide some certainty to employers. However, it must be noted that there is more to it than simply labelling payments as discretionary. To meet the criteria of a discretionary payment, the employer will need to ensure that they retain the discretion as to whether they make the payment or not despite any conditions being met by the employee. If employers make any productivity or incentive payments, they must firstly label them as discretionary, as well as ensuring it is clear that they are not bound in any way to make the payments under a contract and that the payments are being made entirely at their discretion.