Employers are breathing a collective sigh of relief as the Court of Appeal says they don’t owe hundreds of millions of dollars of holiday pay to top executives. But questions remain.
The Ministry of Business, Innovation and Employment’s Labour Inspectorate has lost its bid to see holiday pay added to discretionary annual bonuses - much to the relief of companies all over the country which could collectively have had to fork out hundreds of millions of dollars in back pay over six years.
The money would have gone mostly to already well-remunerated executives.
In a decision released this week in the case of Metro Performance Glass v MBIE’s Labour Inspector, three Court of Appeal judges overturned an Employment Court ruling which had found discretionary bonuses - ones that weren’t guaranteed to staff - did not come under the Holidays Act “discretionary payments” exemption.
Instead MBIE and the Employment Court thought these bonuses (often tens or even hundreds of thousands of dollars apiece) should be seen as part of someone’s gross earnings - and have an 8 percent holiday payment added.
"A court case which would helped make the rich richer," as one executive put it.
MBIE also wanted the decision to be backdated to cover bonuses over six years - hence the millions of dollars of possible liabilities to companies.
In a succinct ruling, the Appeal Court said the Labour Inspector and the Employment Court judges were wrong.
“It’s great news,” Rebecca Rendle, a partner with law firm Simpson Grierson, told Newsroom. “This morning there will have been a lot of very relieved employers.”
Same view from BusinessNZ's employment relations policy manager Paul Mackay. BusinessNZ applied to join Metro Glass in the court action after the Employment Court ruling because of the wide ramifications of the case for the whole business community.
Mackay says he was optimistic after the hearing in July.
“The judges said several times they found our arguments compelling. Still, business would have had to pay for this in spades if it had gone the other way.”
Questions remain, not least as to why MBIE considered this particular action important enough to take to court.
The Holidays Act is basically there to make sure workers don’t lose out financially when they take a holiday.
Employees that do overtime, or work largely on commission or get a lot of allowances, get that built into their holiday pay, so they still have the same amount of money coming in when they take a break.
But there’s an exception written into the Act which says 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”.
It was generally accepted before MBIE brought this case that annual bonuses, which are mostly paid to the top end of town, fell under this exemption.
Not so, said the Labour Inspector. Companies should have been paying 8 percent holiday pay on annual bonuses.
When Newsroom did a story about the issue back in March ('Crazy' Holidays Act decision helps rich get richer) several executives told us off the record that they neither needed nor in some cases particularly wanted the money.
"It’s basically a major unexpected windfall for generally well-remunerated senior executives.” Rebecca Rendle, Simpson Grierson
One chief executive said that with Covid-19 impacting the business, a small number of executives receiving large sums of backdated holiday pay would look bad from the perspective of both employees and shareholders.
Meanwhile, it wasn't great for the bottom line either - big companies were having to keep large sums in reserve to meet potential holiday pay liabilities - money that could have been better spent elsewhere.
“It’s good to see the Court of Appeal decision restore the commonly-held view,” Rendle says. While some bonuses go to middle management, “all the employees we’ve seen who were impacted have been senior. It’s basically a major unexpected windfall for generally well-remunerated senior executives”.
BusinessNZ’s Paul Mackay says MBIE had seen discretionary payments as a grey area for some time and was seeking clarity. Companies didn’t agree.
“It was a fishing expedition by the Labour Inspector to see if these discretionary bonuses were in or out. We argued that Parliament had already clarified what discretionary payments were and these bonuses were clearly not intended to be covered by the Holidays Act.
“The way the Court of Appeal judges expressed their judgment was largely what we argued.”
MBIE had not responded to Newsroom's questions by publication time.
When is a bonus discretionary?
The crux of the matter in the Appeal Court decision revolves around the relative definitions of “discretionary payment” and “gross earnings”, Bell Gully partner Liz Coates says.
The Court of Appeal judges decided its Employment Court counterparts had “overlooked the fact that the key element of the definition of ‘gross earnings’ is that the payment must be one the employer is contractually bound to pay.
“Conversely, the definition of “discretionary payment” is a payment that the employer is not contractually bound to pay.”
As the Appeal Court judges said in their decision: “Metropolitan did more than just label its scheme discretionary. It included an express term that even if all of the conditions were met, it retained the discretion not to make any payment... In our view being neither guaranteed nor conditional the payment would still retain the character of a discretionary payment for the purposes of the Holidays Act.”
On the other hand, bonuses where the only issue up for discussion was how much employers should be paid, not whether they should get anything at all, could be seen as not discretionary, and so liable for holiday payments, Coates says.
Will MBIE appeal?
While MBIE has not yet made a decision whether to appeal, there is debate among other experts as to whether grounds exist to take the case to the Supreme Court.
Mackay says the decision is clear enough to leave little room for appeal, but Buddle Findlay partner Sherridon Cook disagrees. He says there is argument on the interpretation of the legislation, and the wide-ranging public interest makes an appeal more probable.
“My personal view is there is a reasonably significant likelihood they would appeal.”
An act like a Swiss cheese
What no one disagrees on is that the Holidays Act is desperately in need of reform. This is far from the only case where court action has been used to try to clarify a piece of legislation described as being as full of holes as a Swiss cheese.
The Supreme Court is expected to give its decision later this year or early next year on another MBIE Labour Inspector Holidays Act case involving how to treat non-standard payments - this time the case is against Tourism Holdings and revolves around what “regular” means for holiday pay calculations for tour bus drivers who get commissions when they sell additional activities to tour group members.
It’s complicated.
The holiday pay system is just too full of grey areas, says Rendle, as evidenced by hundreds of millions of dollars of backpay that employers, including many government and health agencies, have had to pay to their employers because they got their calculations wrong.
“In our experience, people are not setting out to pay their staff incorrectly,” Rendle says. “There needs to be clearer rules for employers, so they can have certainty.”
Both National and Labour Governments have shied away from major changes to the Holidays Act for more than a decade, Paul Mackay says. Eventually, in 2018 the Council of Trade Unions and BusinessNZ got together to pressure the Government to reform the legislation.
The process is winding through the Parliamentary system, but it’s long and complex and it could be 2024 before new legislation is in place.
That’s too slow, Rendle says.
“Reform needs to be prioritised before 2024. It’s been a longstanding issue and there have been repeated calls for it to be overhauled.”
The situation as it stands is in no one's interest, she says. “There’s just so much risk of inadvertent non-compliance.”
Mackay agrees it would be great to have something in place as soon as possible - the process has already been delayed, only partly because of Covid. But getting a system that is straightforward and works works for everyone is complicated.
“I would love to see an answer far quicker, but I realise given what’s got to be solved, it’s not going to happen quickly.”
In the meantime, court action is the only way to get clarity.
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