Calculating Holiday Pay

Employment

In a recent decision of the Employment Relations Authority, Fleur Board v Adecco NZ Ltd [2011] NZERA Auckland 406 5298004, the Authority tackled the issue of calculating holiday pay and, in particular, whether bonuses should be included in such a calculation.

The answer is surprising - if employers operate a bonus scheme under which employees have a contractual right to payments (even if the amount to be paid may be discretionary and/or contingent upon certain conditions being met) then payments made under that scheme should be included in the calculation of holiday pay. 

The Holidays Act 2003 has an obligation to pay holiday pay calculated on the greater of an employee’s ordinary weekly pay at the beginning of the holiday or the employee’s average weekly earnings for the 12 months immediately before the holiday (section 21).

Ordinary weekly pay includes regular incentive payments (such as commission) and regular overtime. It excludes one-off or exceptional payments and any discretionary payments that the employer is not bound to pay under the employment agreement.

Average weekly earnings includes all payments the employer is required to pay under the employee’s employment agreement (this includes salary or wages, productivity or incentive based payments and overtime) it excludes all payments the employer is not bound to pay under the employee’s employment agreement (including discretionary payments).

The question in Board was whether a bonus payment should be included in the calculation of average weekly earnings.  There was a provision in the Ms Board’s employment agreement which stated that she was entitled to an annual bonus based on the relevant bonus scheme.  The Authority interpreted the words as being a contractual right to a bonus “so that an annual bonus based on the plan was not itself discretionary” i.e. it was a payment the employer was required to pay under the employment agreement. 

This does not mean that all bonuses written into employment agreements will need to be considered in any holiday pay calculation.  Simply writing a bonus term into the employment agreement does not mean the employer is bound to pay the bonus.  A contractual term may only provide employees with a right to participate in a discretionary bonus scheme.  Whether any payment is made may be a matter of discretion for the employer.

Of course, most bonus schemes aren’t wholly discretionary.  Rather, what we see is a hybrid bonus where the right to receive a payment and/or the amount payable is linked to performance (measured against a mix of objective and subjective criteria) and reserved to be determined at the discretion of the employer.  The issue is whether this means the right to receive a payment is discretionary or not.  If there is a right to receive a payment notwithstanding that the amount to be paid may be discretionary or if the payment is contingent upon conditions being met then this is not a discretionary payment.

So, whether your bonus scheme and any payments made under it should be considered in a calculation of holiday pay turns on:

  • the provision in the employment agreement – does this provide a contractual right to payment or merely a right to participate in a scheme or be considered for a bonus at the employer’s discretion; and/or
  • the bonus scheme – does this reserve a discretion for the employer over whether a payment will be made.

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