Court of Appeal Overturns Employment Court Decision on Incentive Payments and Holiday Pay in Favour of Employer

Employers would have been greatly relieved this week to learn of the Court of Appeal’s decision to reverse the ruling of the Employment Court on a holiday pay case which would have seen all short-term incentive (STI) payments counted as part of “gross earnings” under the Holidays Act. The Court of Appeal found that where an STI scheme expressly gives the employer the discretion to not make STI payments (even if relevant targets are met), then those payments will be counted as “discretionary” under the Holidays Act and therefore excluded from “gross earnings” calculations.

The definition of “gross earnings” under the Holidays Act includes “all payments that the employer is required to pay to the employee under the employee’s employment agreement” but excludes “discretionary payments”. In this case, Metropolitan Glass treated its STI payments as “discretionary” and so excluded them from Holiday Pay calculations.

Metropolitan Glass’s STI schemes were set out in standalone documents which expressly gave the company discretion not to make payments even if the relevant targets were met. The Employment Court essentially ruled that any incentive scheme that is recorded in writing and includes performance-based metrics is likely to be considered “non-discretionary”, even when the scheme rules describe it as discretionary.

In making its decision, the Employment Court found that the term “employment agreement” in the “gross earnings” definition should not be interpreted narrowly to mean solely the written employment agreement and can include other documents of policies and schemes which can be incorporated into the employment agreement by inference.

The Court of Appeal upheld Metropolitan Glass’s appeal, ruling that its payments under its STI schemes were discretionary and so could be excluded from Holiday Pay calculations.

The Court of Appeal upheld the Employment Court’s broad interpretation of an “employment agreement”. However, it found that the Employment Court had overlooked the fact that the key element of the definition of “gross earnings” is that included payments must be ones that the employer is contractually bound to pay, and that a “discretionary payment” is one that it is not bound to pay. As the terms of Metropolitan Glass’s STI schemes expressly stated that even if all the relevant conditions were met, it retained the discretion not to pay, its STIs were therefore “discretionary”.

This ruling will be welcomed by many employers who would have been facing costly Holiday Pay claims and future calculations based on the Employment Court ruling. However, the case may yet to be appealed to the Supreme Court. Further, if the coming changes to the Holidays Act, which propose to include all payments except for reimbursements as “gross earnings” are enacted, then this decision will effectively be reversed. So, watch this space.