Q: I have a client who is paying a bonus payment to their employees twice a year based on survey results.

This payment is not guaranteed (depending on survey results) and not included in their employment contracts.

Can you please advise whether this payment should be treated as a discretionary payment and not included in the gross earnings for the calculation of holiday pay?

A: Have employees always received a payment even though it is not guaranteed? Does the employee have an expectation they will receive a payment?  Is it in a policy or other document that the employee agrees too?

Paying this payment twice a year makes it look like a non-discretionary payment.

Here is a link to what discretionary means from MBIE:

What ‘discretionary payments’ means

If an employer is bound under the employment agreement to make a payment, then it is not a discretionary payment. Discretionary payments are ex-gratia payments that an employer doesn’t have to pay the employee under the employment agreement.

• ‘Employment agreement’ should be considered widely ie to include variations of employment agreements, letters of offer, rules of commission schemes, bonus scheme rules, policies etc especially if the employment agreement can be said to incorporate the entitlement to participate.
• If the terms of a payment scheme are intended to be binding on the employer and employees, it is unlikely to be a discretionary payment.
• If an employment agreement states that a payment is a discretionary payment for the purposes of the Holidays Act 2003, this in itself doesn’t make it a discretionary payment. Whether the employer is bound under the employment agreement to make the payment is what determines whether or not it is discretionary.
• If an employer is bound by the employment agreement to make a payment to the employee even if the amount is discretionary (and could be zero), it is not a discretionary payment.
• If the payment is dependent on the employee and/or the organisation meeting eg any type of targets, quotas, performance criteria or indicators this does not make it a discretionary payment.
• If payments are made on a regular and consistent basis eg annually if criteria are met, it is unlikely to be a discretionary payment.
• If employees have a reasonable expectation of payment based on past practice, to the extent that the payment forms part of the employment agreement, it is unlikely to be a discretionary payment.

As it is rare for payments to be excluded it is recommended that employers seek advice before determining that a payment is discretionary, or else err on the side of caution and include the payment.

Examples of payments which are unlikely to be discretionary payments for the purposes of the Holidays Act 2003.

• An employee’s remuneration statement includes a bonus amount at 100%. The bonus is covered by bonus rules that state that payment of and amount of the bonus is dependent on company and employee performance.
• An employee’s employment agreement has an amount for on target earnings (OTE) for commission. The actual amount of commission earned by the employee will depend on how many sales they make.
• Each year the company decides who will be participating in the bonus scheme. Letters are sent out to employees who will be participating telling them that they are eligible to participate this year. The letters state that the amount they receive depends on their performance and could be zero.
• A company gives all employees a Christmas bonus each year. This helps them recruit and keep good staff and employees are told about it by their employer when they start work with the company.

Examples of payments which are likely to be discretionary payments for the purposes of the Holidays Act 2003

• A business has had a really good year and the owner decides to give everyone a one-off bonus to reward their hard work. They do not do this regularly.
• A company gives all employees a Christmas bonus from time to time.
• A company decides that one employee has had an outstanding year and will be given an ex-gratia lump sum payment of 10% of their wages for the last 12 months.

Reference: https://www.employment.govt.nz/leave-and-holidays/calculating-payments-for-leave-and-holidays/gross-earnings/

Q: Yes, employees have received payments in the past based on good survey results.

And they received communication regarding this bonus when it was first introduced. This was the communication they receive.

But this was not included in their company policy or employment contract.

A: This seems to be a very structured scheme and for that reason is does not seem to fit the ad hoc nature of a discretionary payment (out of the blue).