A recent Employment Court decision (Metropolitan Glass & Glazing Ltd v Labour) has shed light on the often murky area of whether payments made under ‘discretionary’ incentive schemes must be included in gross earnings calculations for the purposes of the Holidays Act 2003 (“the Act”).

Metropolitan Glass’ individual employment agreements made no reference to the company’s incentive scheme. Employees were instead invited to participate in what it described repeatedly as a “discretionary bonus scheme”.  The letter, and the acceptance form employees were required to sign in order to participate, both clearly stated that any payments made under the scheme were totally or completely discretionary, and were not guaranteed, even if KPIs for the year were met. The documentation also expressly stated that the scheme was not a term or condition of employment, and that the company could refuse to make a payment under, or amend, revoke or discontinue the scheme at any time. At the same time, participation in the scheme also required employees to agree to extend their existing restraint of trade provisions.

The company essentially argued that because the scheme was as discretionary, payments made under it were also discretionary as far as the Act was concerned, and could therefore be excluded from gross earnings. The Labour Inspector, and ultimately the Court, disagreed.

The Court held instead that despite the widespread ‘discretionary’ labelling that had been applied to it by the company, the scheme was clearly intended to have contractual force and was therefore part of participating employees’ terms and conditions of employment. Further, even if that were not the case, the Court was clear that as far as incentive or performance payments are concerned (both of which are specifically listed in the Act as examples of gross earnings-related payments), a broad interpretation of ‘employment agreement’ is necessary, which might well include workplace policies and other separate, standalone documents.

The Court contrasted detailed incentive schemes with what it considered to be a truly discretionary payment - a one-off, ‘out of the blue’ Christmas bonus. It made clear that even though payment under this particular scheme was conditional on a number of factors, and amounts were variable, neither factor “makes the payment a discretionary payment for the purposes of the Act.”

While any assessment will always be fact-specific, the decision makes clear that simply calling an incentive scheme discretionary, and keeping details out of employment agreements, isn’t enough to make payments under it discretionary for holiday pay purposes.