Employer’s incentive scheme passes the test as a “discretionary payment” - Employment Law Update Apr

The issue as to whether a particular type of payment is a “discretionary” payment or not is an important one for employers. Not only in determining whether or not the employer is required to pay it to the employee but also whether such payments attract holiday pay. If a payment meets the definition under s 5 of the Holidays Act 2003 (the Act) being a “discretionary payment” then it does not attract holiday pay. In short, a “discretionary payment” under that section is essentially a payment that the employer is not bound, by the employment agreement, to pay the employee. Whether or not a payment is discretionary, is a question which often arises with bonus or incentive type payments. The answer will depend on the facts in each instance, but the contents of the employment agreement and any other documentation regarding the payment will be key.


A recent determination of the Employment Relations Authority demonstrates that a well-drafted employment agreement can ensure that bonus payments the employer intends to be discretionary are in fact discretionary.

Although an employer paid an employee an incentive-based payment for 19 out of the 20 quarters an employee was employed, the Authority found that the incentive payment was a discretionary payment due to the wording contained in the employment agreement.

The employee challenged the employer's failure to include the incentive-based payments in holiday pay paid to the employee, claiming that the incentive-based payments fell within the definition of “gross earnings” for the purposes of holiday pay under s 14 of the Act (which means it would attract holiday pay). However, the section of the employment agreement detailing the incentive payment scheme contained wording emphasising the discretionary nature of the incentive payments, which was central to the Authority’s decision.


The Authority considered that the wording in the employment agreement made it clear the incentive payments to the employee were discretionary as per s 5 of the Act and observed phrases in the employment agreement supporting that finding, such as: “Entitlement to an incentive payment under the incentive scheme will be determined on a quarterly basis”; “Assessments and payments are entirely within HIFX’s discretion and are final” and “The employer may vary or withdraw the incentive scheme at its discretion”.


Information reproduced with permission of Wolters Kluwer