Discretionary bonuses do not form part of gross earnings for calculation of holiday pay where the employer truly has a discretion whether to make bonus payments or not, the Court of Appeal ruled in a test case.
A discretionary bonus scheme established by Metropolitan Glass in 2016 wended its way to the Court of Appeal in a test case on calculation of holiday pay. The Holidays Act requires employee holiday pay to be calculated on ‘gross earnings.’ Labour inspectors from Business, Innovation and Employment argued all discretionary bonus payments formed part of gross earnings and should be included in calculation of holiday pay. The Metropolitan Glass scheme set specified financial targets as triggers for bonus payments.
The Court of Appeal ruled there is a Holidays Act distinction between payments subject to specific conditions being met (which are included in gross earnings) and payments where an employer may choose to make no payment even if specified conditions are met (which do not fall within the definition of gross earnings).
Metropolitan Glass was not contractually bound to pay bonuses. Its short-term incentive bonus scheme did set specific targets before payment of bonuses might be considered but the scheme specifically stated that the company retained a discretion to not make any payment even if all conditions were met.
Labour inspectors said this ruling will result in some employers paying a deliberately low salary and topping it up with regular so-called discretionary payments to both reduce liability for holiday pay and to discourage staff from taking holidays. This scenario is an extreme example that cannot detract from a correct interpretation of the Holidays Act, the Court said.
Metropolitan Glass & Glazing Ltd v. MBIE – Court of Appeal (26.10.21)
21.174