When should bonuses be included as gross earnings when calculating holiday pay? That was the question facing the Court of Appeal in Metropolitan Glass & Glazing (“Metropolitan”) v Ministry of Business, Innovation and Employment (“MBIE”).

In 2016 and 2017 Metropolitan had sent a letter to certain employees inviting them to participate in a discretionary bonus scheme. The scheme specified certain criteria that had to be met in order to qualify for the bonus. It also stated that any payments made by Metropolitan under the scheme were entirely at its discretion, and that it had no obligation to make any payment even when all the specified criteria were met.

The issue was whether payments made under the scheme were “discretionary payments” or “gross earnings” under the Holidays Act 2003. Discretionary payments under the Act are payments the employer is not bound to make and these payments are excluded from the definition of “gross earnings”, meaning discretionary payments are not required to be taken into account when calculating holiday pay.

The Employment Court decided that payments under the scheme were “gross earnings” because they were remunerating the employees for the effort they put in. The Court said that the payments were therefore productivity and incentive payments, which fall under the definition of “gross earnings”. It further decided that the fact that the payments were conditional on several factors such as meeting performance targets did not make the payments “discretionary payments”.

The Court of Appeal, however, disagreed and said that the key element of the definition of gross earnings is that the payment must be one the employer is contractually bound to make. Although Metropolitan was under a duty to exercise its discretion regarding the payment fairly and reasonably, the fact that payment was not guaranteed meant it retained its character as a discretionary payment. Therefore, the payments did not have to be included for the purposes of calculating holiday pay.

This decision comes as a relief for many employers, who, based on the Employment Court decision, may have had to back pay employees their holiday pay.