When a Discretionary Payment isn’t Discretionary

A recent full sitting of the Employment Court (three judges), made a decision on a key holiday pay question: what ‘discretionary payments’ such as bonuses are included in holiday pay calculations.

When calculating Holiday Pay the Holidays Act requires “productivity and incentive based payments” to be taken into account. There are however exceptions to this, and one of those exceptions  is “any payment 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 employer in this case had a short term incentive scheme which sat outside of the Employment Agreements. If certain targets were met the employees were paid a bonus payment based on a percentage of their salary. The scheme expressly stated the payment was totally at the discretion of the board, and that there was no guarantee of payment even if the performance targets were achieved.

The Employment Court concluded the scheme formed part of the employment agreement, and that the terms of the scheme being in a separate document did not alter this fact. As such the payments were not discretionary and therefore subject to holiday pay.

In summary the reasons given are:

• The scheme was put in place in exchange for extending existing restraints of trade in the employment agreement.
• The scheme referred to specific examples of when discretion to not pay might be exercised.
• The purpose of the Holidays Act was to “capture all remuneration for an employee’s job”, and address “concerns about employer’s avoiding including variable and conditional payments that formed part of an employee’s remuneration”.
• The Court differentiated between a “truly gratuitous payment” for example a Christmas bonus, which is what Parliament had intended.

This decision is likely to have a significant impact for many organisations, particularly as wage claims can be backdated six years.  If you operate a ‘discretionary’ bonus scheme that is not included in holiday pay calculations we recommend you review this and consider the implications.