Financial motivation is amongst the highest reasons as to why people work. Although there are multiple facets to job satisfaction of course, money is a key driver.
From a business point of view staff remuneration increases come with the obligation of permanency. Committing to an increase in salary or wages is a permanent move. If the company does not increase their revenue respectively the business is potentially in a worse situation in terms of profitability in the future, and if revenue drops the company potentially has to face a restructure situation and redundancies.
A lot of firms consider paying staff bonuses a good option. There are however considerations when paying bonuses also.
Discretionary vs non-discretionary bonuses
Depending upon how the bonus scheme is conceived and implemented, an important point with bonuses is that they can be
discretionary or
non-discretionary.
If a bonus is tied to any form of
performance measure it is non-discretionary. That being if certain criteria are met, the company will make a payment. This doesn't have to be tied to a staff measure of success, nor any particular timing or frequency, it need only be tied to a
contractual obligation. A business often uses bonuses to motivate staff to achieve more or better results and as such often formally documents such a system. The moment they do, the company has a
contractual obligation to staff in this regard - the non-discretionary bonus.
A true discretionary bonus is simply the company opting to make a payment to staff over and above any obligation they have, and often there will be no documentation around this type of bonus. The reality is that this doesn't happen often in business, and in the words of the Ministry of Business, Innovation & Employment (MBIE) "A truly discretionary payment is very unusual."
The effect on holiday pay.
When calculating an employee's annual holiday pay the employer is required to pay the greater of ordinary weekly pay (OWP)
or average weekly earnings (AWE). AWE is based on gross earnings over the previous 12 months, and gross earnings include:
- salary and wages
- allowances (but not reimbursing allowances)
- overtime
- piece rates
- productivity or performance payments, for example, most commissions, bonuses and incentives
- payment for annual holidays, public holidays and alternative holidays
- payment for sick, bereavement and family violence leave
- the cash value of board and lodgings supplied
- the first week of compensation payable by the employer under section 98 of the Accident Compensation Act 2001
- any other payments that are required to be made under the terms of the employment agreement.
Gross earnings do not include:
- reimbursements
- any weekly compensation payable under the Accident Compensation Act 2001 that the employer does not have to make
- payment for leave from work when an employee is on volunteer leave for military service
- payment for annual holidays that have been cashed-up (up to 1 week each entitlement year)
- true discretionary payments.
If a Labour Inspector disagrees that your bonus payments are 100% discretionary and should have counted as gross earnings you will be required to make good on the shortfall for all current and ex-staff. Business payroll records will be inspected for the last 6 years and the company could also be subject to penalties.
A precedent case was seen when MBIE took Metropolitan Glass to the Employment Court when they disagreed on their policy with discretionary bonuses
(METROPOLITAN GLASS & GLAZING LIMITED v LABOUR INSPECTOR, MINISTRY OF BUSINESS AND INNOVATION AND EMPLOYMENT [2020] NZEmpC 39).
MBIE successfully argued that Metropolitan Glass staff bonus scheme was not discretionary and thus holiday pay calculations were erroneous, causing the employer a potential $500,000.00 problem in back pay.
Metropolitan Glass then appealed the decision to the Court of Appeal and won having satisfied the Court with caveats in the scheme obviating the company from potential payments such as:
"...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..."
Employment Leave Act
With the advent of the new Employment Leave Act looking likely, this issue will no doubt be addressed one way or another. At this stage with a far simpler continuous accrual calculation based on hours only it is said that bonuses will not be included in the hourly leave pay rate, so this problem may be a thing of the past.