METROPOLITAN GLASS & GLAZING LIMITED v LABOUR INSPECTOR, MINISTRY OF BUSINESS AND INNOVATION AND EMPLOYMENT [2021] NZCA 560

METROPOLITAN GLASS & GLAZING LIMITED v LABOUR INSPECTOR, MINISTRY OF BUSINESSAND INNOVATION AND EMPLOYMENT [2021] NZCA 560 [26 October 2021]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA246/2020[2021] NZCA 560BETWEEN METROPOLITAN GLASS & GLAZINGLIMITEDAppellantAND LABOUR INSPECTOR, MINISTRY OFBUSINESS AND INNOVATION ANDEMPLOYMENTRespondentHearing: 15 July 2021Court: French, Cooper and Clifford JJCounsel: J M Roberts and E H Callister-Baker for AppellantA E Scott-Howman for RespondentP T Kiely and S R Worthy for BusinessNZ as IntervenorJudgment: 26 October 2021 at 9 amJUDGMENT OF THE COURTA The appeal is allowed.B We answer the question of law submitted for determination by this Court:Did the Employment Court err in law by concluding that paymentsmade by the appellant from its short term incentive bonus schemeswere "payments that the employer is required to pay to the employeeunder the employee's employment agreement" and therefore fellwithin the definition of "gross earnings" under s 14 of the HolidaysAct 2003?Answer: YesC The respondent must pay the appellant costs for a standard appeal on aband A basis with usual disbursements.D Leave is reserved to the parties to come back to the Court on the issue of costsin the Employment Relations Authority and the Employment Court.____________________________________________________________________REASONS OF THE COURT(Given by French J)Introduction[1] The appellant Metropolitan Glass & Glazing Ltd (Metropolitan) implementeddiscretionary bonus schemes for its employees in 2016 and 2017. The schemes werecalled Short Term Incentive Bonus schemes (STIB schemes).[2] Metropolitan considered payments made under its STIB schemes werediscretionary payments for the purposes of s 14 of the Holidays Act 2003, andtherefore not required to be taken into account when calculating the amount of holidaypay it was obliged to pay its employees during annual leave. The Labour Inspectortook a different view. The Inspector said the payments were gross earnings, notdiscretionary payments.[3] The dispute began in the Employment Relations Authority but following a jointapplication was removed to the Employment Court because it was considered to raisean important question of law.1 The Employment Court then convened a full Court tohear the matter. The Court found in favour of the Inspector.2[4] Dissatisfied with that outcome, Metropolitan then sought and obtained leaveto appeal from this Court on the following question of law:3Did the Employment Court err in law by concluding that payments made bythe [appellant] from its short term incentive bonus scheme were "paymentsthat the employer is required to pay to the employee under the employee's1 Metropolitan Glass & Glazing Ltd v Labour Inspector [2019] NZERA Auckland 188.See Employment Relations Act 2000, s 178.2 Metropolitan Glass & Glazing Ltd v Labour Inspector, Ministry of Business and Innovation andEmployment [2020] NZEmpC 39, (2020) 17 NZELR 331 [Employment Court decision]. TheEmployment Court determined another question of law relating to the treatment of annual holidayswhen there is a closedown period. This issue is not before this Court.3 Metropolitan Glass & Glazing Ltd v Labour Inspector, Ministry of Business, Innovation andEmployment [2020] NZCA 264.employment agreement", and therefore fell within the definition of "grossearnings" under s 14 of the Holidays Act 2003?[5] This Court also granted leave to BusinessNZ to participate in the appealhearing as an intervenor. BusinessNZ is concerned about the wider implications ofthe Employment Court decision. It contends if allowed to stand, the decision is likelyto result in backpay obligations amounting to hundreds of millions of dollars forNew Zealand employers throughout the country who believed they were actinglawfully and in accordance with the Holidays Act.The key statutory provisions in the Holidays Act[6] Under the Holidays Act, employees are entitled to four weeks paid annualleave.4 The Act stipulates how the amount of the holiday pay is to be calculated.5For present purposes, the detail of the calculation is not relevant. What is criticalhowever is the statutory definition of "gross earnings" and "discretionary payment".If the payments made by Metropolitan under the STIB schemes came within thedefinition of "gross earnings" then they should have formed part of the holiday paycalculation. But if they were within the definition of "discretionary payments" thenMetropolitan was correct in not taking them into account.[7] "Gross earnings" is defined in s 14 of the Holidays Act in the following way:14 Meaning of gross earningsIn this Act, unless the context otherwise requires, gross earnings, in relationto an employee for the period during which the earnings are being assessed,—(a) means all payments that the employer is required to pay to theemployee under the employee's employment agreement, including,for example—(i) salary or wages:(ii) allowances (except non-taxable payments to reimburse theemployee for any actual costs incurred by the employeerelated to his or her employment):(iii) payment for an annual holiday, a public holiday, an alternativeholiday, sick leave, bereavement leave, or family violenceleave taken by the employee during the period:4 Holidays Act 2003, s 16.5 Section 21.(iv) productivity or incentive-based payments (includingcommission):(v) payments for overtime:(vi) the cash value of any board or lodgings provided by theemployer as agreed or determined under section 10:(vii) first week compensation payable by the employer undersection 97 of the Accident Compensation Act 2001 or formerAct; but(b) excludes any payments that the employer is not bound, by the termsof the employee's employment agreement, to pay the employee, forexample—(i) any discretionary payments:(ii) any weekly compensation payable under the AccidentCompensation Act 2001 or former Act:(iii) any payment for absence from work while the employee is onvolunteers leave within the meaning of the VolunteersEmployment Protection Act 1973; and(c) also excludes—(i) any payment to reimburse the employee for any actual costsincurred by the employee related to his or her employment:(ii) any payment of a reasonably assessed amount to reimbursethe employee for any costs incurred by the employee relatedto his or her employment:(iii) any payment of any employer contribution to asuperannuation scheme for the benefit of the employee:(iv) any payment made in accordance with section 28B.[8] As will be seen, excluded from the concept of "gross earnings" are paymentsthat the employer is not bound by the terms of the employee's employment agreementto pay. A discretionary payment is then cited as an example of such a payment.[9] The term "discretionary payment" is itself separately defined in s 5(1) of theHolidays Act:discretionary payment—(a) means a payment that the employer is not bound, by the employee'semployment agreement, to pay the employee; but(b) does not include a payment that the employer is bound, by theemployee's employment agreement, to pay the employee, eventhough—(i) the amount to be paid is not specified in that employmentagreement and the employer may determine the amount to bepaid; or(ii) the employer is required under that employment agreement tomake the payment only if certain conditions are met[10] The effect of this definition is to make clear that a payment will still beconsidered a payment that the employer is bound by the terms of the employmentagreement to pay and so not a discretionary payment even although:(a) the amount to be paid is not specified in the employment agreement andmay be determined unilaterally by the employer; or(b) the employer's obligation to make the payment under the employmentagreement is subject to certain conditions being met, that is to say isconditional.Metropolitan's STIB schemes[11] In January 2016, Metropolitan sent a letter to certain senior employees invitingthem to participate in what the letter described as a discretionary bonus scheme.[12] The salient features of the letter and the scheme are conveniently summarisedin the Employment Court decision:6[7] The letter advises that the basics of the [STIB] Scheme for 2016 were:1. The Scheme has a non-negotiable condition that theremust be no significant health and safety incidentswhich result in death or permanent material disabilityof any worker or that are caused by any worker of[Metropolitan].2. The Scheme will be aligned to the achievement of threekey deliverable targets:a) EBIT targets - 75% weighting6 Employment Court decision, above n 2.b) Retrofit Sales Revenue - 12.5% weightingc) DIFOT - 12.5% weighting3. The targets in point two are independent of oneanother, therefore if one target is not met, the employeemay still receive payment under the Scheme uponachievement of one or more of the remaining targets.4. Any payment made under the Scheme will be based ona full 12 months of your base salary (assuming youhave been employed since at least 1 April 2015).5. If you have been employed after 1 April 2015 anypayment will be pro-rated for the number of monthsemployed.6. For those who are based in the regions and their roleshave a regional only focus, any bonus payment will bebased on the regional financial performance.7. Any payments made under this Scheme this year willhave a maximum payment amount of 120% based onachieving 110% of the relevant target deliverables.8. Any payments made under this Scheme are totally atthe discretion of Metro's Board of Directors and thereis no guarantee of any payment even if the DIFOT,Retrofit & EBIT performance targets are achieved.[8] The letter outlined the targets for that year's [STIB] Scheme, withincentive payments calculated as a percentage of base salary where the targetswere met.[9] The letter also attached the terms and conditions of the [STIB]Scheme. Those terms and conditions include:Any payments made under this Scheme are totally atthe discretion of [Metropolitan] and there is noguarantee of any payment in any year. [Metropolitan]has the sole discretion not to make any payment evenwhere the criteria in this Scheme are met. This Schemeis not a term and condition of your employmentagreement.Accordingly, any bonus payments made under thisScheme will not come within the definition of "totalgross earnings" for the purposes of holiday paycalculations under the Holidays Act 2003.[10] The terms and conditions go on:The payment of any amounts pursuant to this Schemeare subject to various conditions which may beamended by [Metropolitan] from time to time[11] Some conditions are listed including that:Following the completion of the year-end financialstatements [Metropolitan] will calculate any bonus anddetermine whether a bonus payment will be made. If[Metropolitan] decides to make a bonus payment, thiswill not occur until the Board of Directors hasapproved the bonus payment.[12] The terms and conditions again say that the [STIB] Scheme isdiscretionary and therefore that Metropolitan Glass may choose to make, ornot make, payments under the [STIB] Scheme at its discretion. MetropolitanGlass also was able to amend, revoke or discontinue the [STIB] Scheme atany time at its sole discretion, including during a fiscal year.[13] The terms and conditions gave some examples of whenMetropolitan Glass might choose to exercise its discretion to change the termsof the scheme and/or not make payments, even where criteria are met, being:• The employee has been subject to disciplinary actionduring the period of the Scheme.• The employee has been involved in, responsible foror failed to prevent a significant Health & Safetyincident or breach.• The employee's overall performance appraisal resultwas Needs Improvement.[14] When accepting the offer, the employee signed the letter of invitationacknowledging that payment under the [STIB] Scheme: is completely discretionary and [Metropolitan] canat its sole discretion decide not [to] make any paymentunder this scheme, or amend, revoke or discontinuethis Scheme at any time. [13] As already mentioned, Metropolitan implemented a second STIB scheme in2017. It contained a provision that in consideration for the invitation to participate inthe scheme the employee agreed to an extended restraint of trade clause. In all otherrespects, the terms and conditions of the 2017 STIB scheme were substantially thesame as the 2016 scheme.Grounds of appeal[14] Metropolitan advances two key grounds. Both relate to the definition of grossearnings which it will be recalled is "all payments that the employer is required to payto the employee under the employee's employment agreement". Metropolitan submitsthe definition comprises two elements, neither of which is satisfied in the case of theSTIB schemes.(a) The payment must be made under the employment agreement.Correctly interpreted, the phrase "employment agreement" as it appearsin s 14 of the Holidays Act means a narrowly defined writtencontractual document that complies with the various requirementsunder the Employment Relationship Act 2000. The employees inquestion had comprehensive individual employment agreements whichcomplied with the requirements of the Employment Relations Act bothas to content and pre-contractual process. The STIB schemes were notmentioned in those formal agreements. They were contained in anentirely separate, stand alone document. Therefore the payments werenot made under the employment agreement.(b) The payment must be a payment the employer is required to make.Here, the making of any payment under the STIB scheme was whollydiscretionary.[15] These two key arguments were also raised in the Employment Court. It istherefore convenient to structure our discussion around each issue separately.What is the meaning of "employment agreement"?The Employment Court decision[16] In rejecting Metropolitan's contention, the Employment Court held that anemployment agreement may be comprised of components in more than one place.Policies may be incorporated into an employment agreement not only by expressreference but also by inference. As regards the latter mode of incorporation, the Courtsaid the test to be applied was whether it is reasonable to infer from the circumstancesthat the parties must have intended the relevant terms to have contractual force. 77 Employment Court decision, above n 2, at [24].[17] Applying that test to the STIB schemes, the Court held that the schemes weredesigned to incentivise employees and the payments were thus remuneration for effort.The fact the parties intended the schemes to have contractual force was, the Courtfound, reinforced by consideration of the fact that in 2017 the STIB scheme involvedan extension of the restraint of trade clause.8[18] The Court went on to hold that "[i]n any event at least in the context of s 14"the narrow approach argued by Metropolitan cannot have been intended byParliament. That was evidenced by the express inclusion of productivity and incentivepayments in s 14(a)(iv). That provision clearly contemplated that such payments arecaptured whether the payments arise out of a written individual agreement or frompolicy documents or contained in a separate document.9Metropolitan's arguments on appeal[19] Counsel for Metropolitan, Mr Roberts submitted the Court's reasoning wasbased on interpreting the term "employment agreement" in s 14 as if it included all ofthe rights, benefits and obligations arising out of the employment relationship.However, in his submission, that interpretation was contrary to the distinction betweenemployment agreement and terms and conditions of employment that has been drawnin the caselaw, including a decision of this Court.10 It was also contrary to a numberof statutory provisions.[20] Developing that submission, Mr Roberts argued that "employment agreement"under the Holidays Act has the same meaning as it has under the EmploymentRelations Act. He then referred us to a number of sections in the Holidays Act and theEmployment Relations Act which use the phrase "employment agreement" and whichbecause of the subject matter can only be using that phrase in the sense of the formal8 At [25].9 At [26].10 Tranz Rail Ltd v Rail & Maritime Transport Union (Inc) [1999] 1 ERNZ 460(CA). See also Elstonv State Services Commission (No 3) [1979] 1 NZLR 218 (SC) at 234–235, citing Stock v FrankJones (Tipton) Ltd [1978] 1 WLR 231 (HL) and British Broadcasting Corp v Hearn [1977]1 WLR 1004 (CA); ANZ National Bank Ltd v Doidge [2005] ERNZ 518 (EmpC) at [45]; Johnsonv Chief of the New Zealand Defence Force [2019] NZEmpC 192, (2019) 17 NZELR 137 at [72]–[79]; and Spotless Facility Services NZ Ltd v Mackay [2017] NZEmpC 15 at [49]–[50].written employment contract, not the different concept of terms and conditions ofemployment.11[21] Mr Roberts accepted it was possible to incorporate another document into anemployment agreement if the employment agreement contained an express referenceto that other document. But in this case the STIB schemes were not mentioned in therelevant employment agreements. As for the Employment Court's reliance onincorporation into the employment agreement by inference, Mr Roberts argued thatcould not apply in this case either because each STIB scheme contained an expressprovision that the scheme did not form part of the employment agreement.Our assessment[22] The starting point of the textual analysis must be s 5(2)(a) of the Holidays Act.It provides that certain specified terms in the Act are to have the same meanings as ins 5 of the Employment Relations Act. One of those specified terms is"employment agreement."[23] However, that is not all that s 5(2) says about adopting Employment RelationsAct definitions for the purposes of the Holidays Act. It adds a qualifier "unless thecontext otherwise requires". Further and in any event, when one goes to the definitionof "employment agreement" in the Employment Relations Act itself, it too is expresslysubject to the context otherwise requiring. That explains why the Inspector was ableto point us to provisions in the Employment Relations Act where"employment agreement" did not have the narrow meaning attributed to it byMetropolitan.12 The usage is not consistent.[24] Moreover, looking at the wording of the Employment Relations Act definition,it is significant that the core element of the definition of "employment agreement" is"means a contract of service". References to collective and individual employmentagreements in the definition are prefaced with the word "includes".11 Employment Relations Act, ss 4(4)(a)–(bb), 5, 32, 54, 63A(1), 63A(2)(a)–(d), 64(1)–(2) and (6),65, 66(4) and (6), 67A(2)(a), 67D(1), 67E, 67F(2)(b) and (3) 67G(2), 69OJ, 103(1)(a)–(b), (h) and(4)(b), 104(1), 106(4), 108(1), 108A, 109, 110, 110A, 118, 123(d), 130(1B)(b) and (c); andHolidays Act ss 5(2)(a), 28C, 28D, 44A, 44B, 52 and 53.12 Employment Relations Act, ss 61, 62(2), and 238. Holidays Act, s 6.[25] In short, it is wrong in our view to assume that the term"employment agreement" will always have the same meaning wherever it appears inthe legislation.[26] That leads us to the well-established principle that a contract of employment(service) between employer and employee may comprise terms arising from a numberof different sources. Indeed, that is virtually always the case given the ongoing anddynamic nature of the employment relationship. To put it another way, the formalwritten employment agreement is never the entire contract of service. It is only onesource (albeit often the main source) of contractually binding terms.13[27] Drawing all those threads together, our view is that what meaning is to beattributed to the phrase "employment agreement" as it appears in s 14 and s 5 turns oncontext and the underlying purpose and policy justifications.[28] It is we consider noteworthy that Mr Roberts was unable to identify any policyreason why Parliament would have wanted to limit the meaning of"employment agreement" in a narrow way in the context of s 14. If his interpretationwere correct, it would mean that an incentive payment would be regarded as grossearnings if it were contained in the main employment agreement, but a discretionarypayment if it was in a separate document even although the terms of the incentivepayment were exactly the same. That in our view would be a nonsensical result whichParliament is most unlikely to have intended.[29] In our view, the meaning of the provisions is clear. The hallmark of adiscretionary payment and what distinguishes it from gross earnings is that it is apayment the employer is not contractually bound to make. If the employer wascontractually bound to make the payment, then subject to a limited number of specifiedexceptions, it is gross earnings. The source of the employer's contractual obligationis irrelevant.13 NZ Meat Workers and Related Trades Union Inc v AFFCO (NZ) Ltd (2009) 6 NZELR 643 (EmpC)at [45].[30] Contrary to a submission made by Mr Roberts, that interpretation does notrender the reference to "under the employee's employment agreement" meaninglessor surplusage. The reference makes clear that the sort of obligations that are relevantare contractual obligations.[31] The interpretation we adopt is entirely consistent with the legislative purposewhich is to ensure that employees are not financially disadvantaged when they takeannual leave. They should generally be in no worse position than if they wereworking. Otherwise there is a disincentive to take the leave.[32] It follows we agree with the Employment Court that the mere fact theSTIB schemes were in separate documents to the individual employment agreementsdoes not of itself take them outside the category of gross earnings.[33] In our view this case turns on whether Metropolitan had a contractualobligation to make the payment however that obligation arose. And it is to that issueand the meaning of discretionary payment that we now turn.Meaning of discretionary paymentThe Employment Court decision[34] The Court held that the scheme of s 14, especially when considered with thewords and purpose of the s 5 definition of discretionary payment, was to capture allremuneration for an employee's job.14 That this included productivity and incentivebased payments was made clear by s 14(a)(iv).15 It will be recalled that s 14(a)(iv)gives as an example of gross earnings "productivity or incentive-based payments(including commission)". Such payments were the Court said to be contrasted withtruly gratuitous payments such as Christmas bonuses that were paid on an employer'sown initiative.1614 Employment Court decision, above n 2, at [33].15 At [34].16 At [33].[35] Applying that interpretation of s 14 to Metropolitan's STIB scheme, the Courtsaid that as the name of the scheme suggested the payments under the schemes are toprovide an incentive for performance and were tied to productivity targets.They therefore fell within s14(a)(iv).17 It went on to say that Metropolitan could notavoid its responsibility as it was trying to do by labelling the scheme as discretionaryand by making the payments variable or conditional.18 Under the statutory definitionof "discretionary payment" neither the variability of the amount of the payment northe conditional nature of it makes the payment a discretionary payment for thepurposes of the Act.19[36] The Court drew support for its interpretation of the statutory provisions from aSelect Committee report presented to Parliament when the Holidays Act was amendedin 2010 to include the current definition of "discretionary payment".20Our view[37] As we understand the Employment Court's decision, the central premise andthe effect of it is that an incentive or productivity based payment will always be grossearnings within the meaning of the Act and can never be a discretionary payment.[38] As a result of taking that approach to the statutory regime, the Court neverproceeded to consider whether the existence of a residual discretion under theSTIB scheme not to make any payment even if all conditions were met took it outsidethe scope of gross earnings and into the territory of a discretionary payment.[39] In our view, that was an error because it overlooked that the key element of thedefinition of gross earnings is that the payment at issue must be one the employer iscontractually bound to pay. Conversely the definition of discretionary payment is apayment the employer is not contractually bound to pay. As already mentioned, thatis the dividing line between them. Section 14 does not say all employment relatedremuneration for the job is gross earnings, something it could easily have said.17 At [35].18 At [36]–[37].19 At [38].20 At [31] citing Holidays Amendment Bill 2010 (195-2) (select committee report) at 2–3.[40] It is of course correct that conditional payments are outside the definition ofdiscretionary payments but in our view that is only where the employer is contractuallybound to make the payment if the conditions are met. We are reinforced in thatinterpretation by reference to the same passage in the Select Committee report whichthe Employment Court cited and from which it drew its Christmas bonus example.What the Select Committee said was:21 employees may have agreements with their employer that they will receivea yearly bonus providing certain conditions are met. The amount of the bonusmay be a set amount or a variable amount; and it may not be payable everyyear because the employee may not meet the conditions every year. It shouldbe included in the calculation of an employee's gross earnings (and thereforenot treated as a discretionary payment) because it is part of the employmentagreement, and it will be paid if the employee meets the conditions. Anexample of a discretionary payment by contrast is a Christmas bonus paid onan employer's own initiative to an employee where there is no provision for itin the employment agreement. Such a payment should not be included in anemployee's gross earnings.(emphasis added)[41] Metropolitan did more than just label its scheme discretionary. It included anexpress term that even if all of the conditions were met, it retained the discretion notto make any payment. It would of course be under an obligation to exercise thatdiscretion fairly and reasonably,22 and a failure to do so could be grounds for a personalgrievance, but in our view being neither guaranteed nor conditional the payment wouldstill retain the character of a discretionary payment for the purposes of theHolidays Act.23[42] We have considered whether a residual discretion to make no payment at all isthe equivalent of a provision empowering the employer to determine the amount ofthe payment thereby bringing the scheme within subs (b)(i) of the s 5 definition of"discretionary payment". However it is a pre-requisite to the application of subs (b)(i)21 Holidays Amendment Bill 2010 (195-2) (select committee report) at 2–3.22 The obligation of an employer to act fairly and reasonably consistent with its statutory obligationof good faith is well established and has been applied in cases involving bonus payments:Jamieson v Fortlock Security Systems (2008) Ltd [2019] NZERA Auckland 408; and Gordon vAdshel New Zealand Ltd [2014] NZERA Auckland 159.23 For completeness, we record that in our view the fact that one of the STIB schemes was tied upwith employees agreeing to an extension of a restraint of trade covenant does not render thepayment non-discretionary. In our view, correctly analysed the consideration given byMetropolitan to the employees for agreeing to the extension was the right to be part of the STIBscheme, that is to say the right to be considered.that the amount to be paid is not specified in the agreement. The STIB schemes dospecify amounts.[43] Finally we have also considered the submission made on behalf of theInspector that if we were to uphold the appeal, that would enable an employer to payan employee a deliberately low salary and top it up with regular so-called discretionarypayments. As a result, the holiday pay would be much less than regular remunerationand the employee thereby disincentivised from taking holidays.[44] We consider that to be an extreme example that cannot detract from what weconsider to be a correct interpretation of existing provisions. Moreover if BusinessNZis right and our interpretation restores what has always been the settled understandingof its members prior to the Employment Court decision under appeal, there would beevidence of such a practice. Yet, there is none.Outcome[45] The appeal is allowed.[46] We answer the question of law submitted for determination by this Court:Did the Employment Court err in law by concluding that payments made bythe appellant from its short term incentive bonus schemes were "payments thatthe employer is required to pay to the employee under the employee'semployment agreement" and therefore fell within the definition of "grossearnings" under s 14 of the Holidays Act 2003?Answer: YesCosts[47] In the event the appeal was successful Mr Roberts sought costs for a standardappeal on a band A basis with usual disbursements. There is no reason why costsshould not follow the event and we so order.[48] Mr Roberts also asked that costs in the Employment Relations Authority andthe Employment Court should lie where they fall. We are not aware of any costs awardbeing made in either forum and therefore there does not seem to be any need for us tomake any order. In the event we are wrong about that, then leave is reserved to theparties to come back to this Court on that issue.Solicitors:Hesketh Henry, Auckland for AppellantCrown Law Office, Wellington for RespondentKiely Thompson Caisley, Auckland for Intervenor