Discretionary bonus schemes

Tuesday 21 December, 2021

A recent decision from the Court of Appeal has overturned an earlier Employment Court ruling on whether discretionary bonus payments are to be taken into account when calculating holiday entitlements. This reversal could have significant ramifications for employers offering, or wanting to offer, discretionary bonuses to staff.

The case centered around various bonus schemes that the employer, Metropolitan Glass & Glazing Ltd, had invited certain employees to participate in, with bonuses aligned to key deliverable targets for the business. The schemes were worded in such a way to make it clear that Metropolitan Glass intended to retain discretion over any payments made and could, at its sole discretion, decide not to make any payment under the schemes and could change or revoke the schemes at any time. There was a disagreement between Metropolitan Glass and the Labour Inspector over whether bonuses paid under the schemes formed part of the employees’ gross earnings for annual holiday purposes.

Under the Holidays Act 2003, “gross earnings” is expressed as meaning “all payments” that an employer is required, under the employment agreement, to pay the employee, including any “productivity or incentive-based payments” but excluding any payments that the employer is not bound by the employment agreement to pay, such as discretionary payments.

The Labour Inspector was claiming that payments made under the bonus schemes should be included in gross earnings as being productivity or incentive-based payments, while Metropolitan Glass was saying that they were right to be excluded as discretionary payments.  While the Employment Court initially sided with the Labour Inspector, finding that the payments formed part of gross earnings, the Court of Appeal has now reversed this decision, finding that, under the wording of the schemes, Metropolitan Glass was not contractually bound to make any payment and the payments that were made were therefore excluded as being “discretionary”.

While we have previously advised employers that payments made under bonus schemes will factor into holiday pay calculations based on the Employment Court decision (and other decisions prior), this change on appeal allows for true discretion to be retained through careful drafting of the documents.  For now anyway…

The Labour Inspector may still appeal the decision to the Supreme Court. Changes to the Holidays Act are also in the pipeline and could see the definition of “gross earnings” replaced with one which captures all cash payments (other than reimbursing payments) made to the employee.

Please contact our employment experts below if you would like an assessment of whether payments made under an existing bonus scheme are likely to attract holiday pay, or for assistance in drafting a new scheme.