Top-end-of-town executives on big salaries and generous bonuses could be getting a windfall payment - courtesy of the Holidays Act
An Appeals Court hearing scheduled for July could see some of our best-paid executives receive up to six-years-worth of backdated holiday payments on their discretionary bonuses - potentially hundreds of millions of dollars in total.
Even some of the executives themselves say it’s crazy.
It starts with legislation with worthy intent - to protect workers when they take a holiday. "Modern" Holidays Act legislation, first introduced in 1945, is there to make sure people aren't financially worse off when they take a break.
“So if you normally work a lot of overtime, the Act makes sure you get your overtime paid when you are on holiday,” says self-confessed Holidays Act nerd, and Buddle Findlay partner Hamish Kynaston. Same with allowances. Or with sales people on low salaries and high commissions.
“If they didn’t get their commissions built into their holiday pay, they could lose a big percentage of their income,” Kynaston says. “There are all sorts of calculations in the Act to make sure you are not disadvantaged when you take a holiday.”
Holiday pay is complicated, but at its most basic, the arguments in this case come down to employees being entitled to an 8 percent payment on their gross earnings to cover for holidays. People on a salary tend to get it factored into their pay packet so they get their normal pay when they are on holiday; casual workers might get an actual 8 percent payment.
But there’s an exception written into the Act which might - or might not - cover bonuses.
Holiday pay is not payable on “any payments that the employer is not bound, by the terms of the employee’s employment agreement, to pay the employee, for example any discretionary payments”, the Act says.
Top end of town
Some companies pay annual bonuses to a range of staff - both low and high in the pecking order. They might be based on an individual person’s performance, for example, or that of the whole business.
But let’s be honest, most discretionary bonuses go to the top end of town - senior executives incentivised (or incentivising themselves) with juicy packages, including bonuses.
Banks, law and accounting firms, and big corporates like Air New Zealand, SkyCity, Fonterra or Fletcher Building all use, or have used, bonuses for their CEOs and top brass.
And it was generally accepted that these bonuses would be exempted from the 8 percent Holidays Act considerations by the “discretionary payments” exemption.
Until now.
Between August 2019 and January 2020, before Covid put some of these bonuses firmly (if one suspects temporarily) into the ‘discretionary - ie not being paid’ - category, three Employment Court judges considered a test case.
This was the Labour Inspector, Ministry of Business, Innovation and Employment versus Metropolitan Glass and Glazing, more commonly known as listed company Metro Performance Glass.
At stake: “Do the payments made under Metropolitan Glass’s short-term incentive schemes come within the definition of ‘gross earnings’ for the purposes of section 14 of the Holidays Act 2003?”
Yes, said the Labour Inspectorate, which has set itself the task of investigating potential Holidays Act breaches in a number of areas.
No, said the country’s biggest supplier and manufacturer of glass.
Yes, said the three Employment Court judges, in a decision released in April 2020.
We don’t agree, said Metro Glass. The Appeals Court hearing is set for July 15 this year.
“We don’t need it; some of us don’t want it.” - Senior executive
In the meantime, companies wait in these troubled times to find out if they have to find potentially large sums of money to pay mostly well-paid senior executives.
"Total madness"
“It’s total madness,” one senior executive set to benefit from the 8 percent top-up told Newsroom. In a time when companies are being hit by Covid, a potentially substantial, unplanned-for payment is ridiculous.
“We don’t need it; some of us don’t want it.”
Kynaston says for large corporates with people earning hundreds of thousands of dollars-worth of bonuses, this could be very expensive.
“Anyone who issues proceedings now will be able to say ‘you owe me holiday pay on bonuses for six years’."
He remembers a case a few years ago where someone’s bonus was somewhere in the order of $1.4 million.
Eight percent of $1.4 million is $112,000. The average take-home salary in New Zealand is $59,000, according to the Average Salary Survey.
Kynaston thinks the Employment Court judges made the wrong call - and says he isn’t the only lawyer with the same view.
“Rather than taking a plain meaning approach, the court took a purposive (based on purpose) approach - to catch all payments you earned,” he says.
“If Parliament had intended only ‘truly gratuitous payments’ to be excluded, we think it would have used different wording when defining ‘discretionary payment’.”
Creating a financial liability
Business New Zealand’s manager for employment relations policy Paul Mackay says the problem for companies, not just Metro Glass, is they haven’t budgeted on paying the extra 8 percent on bonuses.
He believes the financial liability across New Zealand could potentially run into the hundreds of millions of dollars over the six years - and the majority will be owed to senior executives.
“There are enormous amounts of worry that there is an enormous amount owing, particularly to people at the big end of town - a bunch of executives with reasonable bonuses.
Ironically, the upcoming and much-needed overhaul of the Holidays Act is likely to settle the point - taking out any exclusions, and therefore any grey areas.
If that happens, companies will adjust their bonus schemes going forward to fit their budgets, Mackay says. But it’s the up-to-six-years retrospective nature of the Employment Court ruling that has companies worried.
“If you have been excluding it for years, a decision that says what you are doing is wrong, creates a financial liability.”
The appeal in July will be important, he says.
The arguments on both sides
Some companies won’t find it easy to afford the bonus payments. Hence, Metro Glass’ decision to appeal the decision.
The company has had a somewhat chequered history since listing on the NZX in 2014, with commentator Brian Gaynor critical of the performance of its senior leadership in an article in 2017.
And times are still tough.
Simon Mander, who took over as CEO in January 2019, told the stock exchange in February that group earnings before interest and tax (EBIT) for the year to the end of March 2021 would be in the range of $16.5 - $18 million, versus $21.8 million in 2020. EBIT before significant items was $25 million in 2019 and $31 in 2018.
“The negative repercussions on the New Zealand economy caused by the Covid-19 pandemic are expected to be significant and result in lower construction activity for the coming 12 - 24 months,” Mander said in the company's 2020 annual results presentation. “The glass processing and installation industry also continues to be very competitive.”
Metro Glass argues in the wording for its short term incentive scheme which is linked to company performance, including “no death or serious injury” health and safety provisions, that the bonuses do not come under the definition of “total gross earnings”.
“Any payments made under this Scheme are totally at the discretion of [Metropolitan Glass] and there is no guarantee of any payment in any year. [Metropolitan Glass] has the sole discretion not to make any payment even where the criteria in this Scheme are met. This Scheme is not a term and condition of your employment agreement.
"Accordingly, any bonus payments made under this Scheme will not come within the definition of "total gross earnings" for the purposes of holiday pay calculations under the Holidays Act 2003.”
Not so, says Labour Inspectorate National Manager Stu Lumsden. He says the Metro Glass case was intended as a test “to clarify the rules for all New Zealand businesses”.
“Not including these types of bonuses in the calculation for holidays and leave payments means employees get paid less than they are entitled to by law,” Lumsden says.
“We encourage other businesses to use this case to check their own compliance with the Holidays Act.”
Compliance headache
Almost as much of a headache for companies as paying the potential additional 8 percent on bonuses, Hamish Kynaston says, is having to rework their payroll systems - and not for the first time.
The Holidays Act has been causing trouble for companies for years. Companies and Government departments have been caught out - sometimes deliberately trying to flout the intention of the act and pay employees less than they should. but at other times simply misinterpreting unclear legislation.
And then everyone has to adjust the way they calculate holiday pay, Kynaston says.
“Each time there is a change, you have to recreate your payroll, because each change affects everything going forward."
"If you talk to the average executive concerned, they think it is nuts.” - Paul Mackay, Business NZ
And that's time-consuming and costly.
“You have to engage someone to come up with a flash computer programme. It’s a massive exercise, particularly if you have remediated before. These processes take years and millions of dollars for large organisations.
The Ministry of Business, Innovation and Employment was one of thousands of companies and government departments affected by historic Holidays Act payroll remediation issues between 2008 and 2018.
"Companies are worried they are going to have to go through all that again,” Kynaston says.
And what for?, asks Business NZ's Paul Mackay.
“There’s a perversity to it; a case of making the rich get richer, which is dumb. If you talk to the average executive concerned, they think it is nuts.”
“The concept of holiday pay is you shouldn’t get less income than you would have normally got. But by the same logic, you shouldn’t be better off.
“The average person at that level is being paid enough as it is.”
