A Court of Appeal decision may have saved businesses millions of dollars in potential backpay.

The Court of Appeal has overturned an Employment Court ruling, which said that payments from bonus schemes should be used in holiday pay calculations.

The case between Metropolitan Glass and Glazing and the Ministry of Business, Innovation and Employment (MBIE), considered whether Metropolitan Glass was wrong not to include payments from its bonus scheme in holiday pay calculations.

The employment court initially found that bonuses should be included. But the Court of Appeal ruled they were not part of gross earnings. Payments to staff under the Holidays Act have been a big source of cost and confusion for years.

Under existing legislation, holiday pay can be calculated either on the basis of ordinary weekly pay at the beginning of a holiday, or the average weekly earnings over the previous 12 months. Employers must pay whichever gives the employee more money. A review of the law is likely to result in legislation being introduced to Parliament early next year.

Kirk Hope​, chief executive of Business NZ, said if the employment court’s decision had been upheld, businesses across the country could have been forced to backpay a minimum of $500 million in holiday pay. Hope​ said the earlier decision would have been “pretty frightening” for many businesses that assumed they had lawfully paid their employees holiday pay.

He was happy that the court of appeal overturned the decision. Alastair Espie​, a senior associate at Duncan Cotterill​ law firm agreed that if the Court of Appeal had upheld the employment court’s decision, then the amount of backpay required from employers would have been large. “Imagine there are a lot of employers out there who do operate discretionary bonus schemes without factoring in holiday pay, and I think it is fair to say that has been a fairly common practice, if this decision had gone the other way then there would be a lot of money that would need to be accounted for,” Espie​ said.

Espie​ said that while this particular case had been settled in the Court of Appeal, the overhaul of the law could change the picture again. “One of the recommendations that the Holidays Act taskforce has brought to the Government is that all earnings are to be factored into holiday pay.“While for now the Court of Appeal has said that truly discretionary bonus payments don’t have to be included in holiday pay calculations, if the Government chooses to act on that report then this is an issue that may be changed again in the future,” Espie​ said.

Espie​ said it was also a possibility that MBIE could bring the issue to the Supreme Court.

A team within MBIE’s Labour Inspectorate has been focused on Holidays Act non-compliance since 2016 and have taken action against a number of employers. Payments owed to staff have ranged from a matter of dollars to well over $10,000.

Reference: https://www.stuff.co.nz/business/126791378/employers-dodge-500-million-bullet-as-court-of-appeal-rules-bonuses-not-to-be-included-in-holiday-pay