In the first blog of this series covering the changes to the Holidays Act that have been accepted by the government, we covered the approach to the definition of a week. In this case the only real change to the Act is to attempt to more clearly define how a week can be calculated. In this blog we will cover a major change to Gross Earnings in the Holidays Act that may well determine how people choose to remunerate their staff going forward.
Gross Earnings
One of the most well-publicised issues with the interpretation of the current Holidays Act has been the definition of Gross Earnings. Gross Earnings is important as it is used in the calculation of an employee’s average weekly pay (AWE) and their average daily pay (ADP) which are both key in the calculation of Annual Leave and FBAPS leave payments.
The current Act has a complex definition for Gross Earnings which includes obvious things such as salary, wages, allowances and so on, but excludes discretionary payments and other payments for which an employer is not contractually bound. There have been many cases, the most recent of which being Metropolitan Glass & Glazing Limited v Labour Inspector [2020] NZEmpC 39, that have challenged the definition of discretionary. In general, the courts have taken a stringent approach to discretionary to the point where it has become difficult to argue that any payment made is purely discretionary, and therefore could be excluded from Holiday Pay calculations.
The recommendations take this a step further and fully remove the concept of discretionary from gross earnings. Under the new Act, gross earnings will include all cash payments received except direct reimbursements for costs incurred.
The implication for this is significant. An employer who may choose to reward some of their team with a financial bonus for a job well done, even where there is no contractual basis for doing, so will now be further burdened by having to include that bonus in Holiday Pay calculations for the next 12 months. This potentially increases the value of that bonus by up to 8%. This puts us in the situation where a person that received a discretionary bonus will, for the next 12 months, be paid more for taking annual leave than they would have been if they had worked, even if they are paid a very consistent salary.
It is clear that this will now discourage many employers from providing these sorts of bonuses which is a shame for both parties.
Of course these new rules will not come into effect until at least 2022 and will not be retrospective, so employers will still need to remediate past payments. This can be achieved in a cost-effective manner using the Holidays Act Remediation Engine solution developed by Mero.