Do Post Employment Earnings Attract Holiday Pay?

The Employment Court answers the question: is a former employee entitled to holiday pay on earnings received after they have finished work?

Mr Howell was employed in the role of General Manager (Finance and Administration) with MSG Investments Limited (formerly Zee Tags Limited).  The terms and conditions of his employment were contained both in an individual employment agreement, and a separate Growth Incentive Agreement (GIA).

The GIA provided for incentive payments to Mr Howell in certain defined circumstances.  Those circumstances included termination on the grounds of redundancy prior to 1 April 2013.  The incentive payment was calculated by a formula based on the fair market value of the employer’s shares as at the date of termination of employment.  Payment was to be made within 30 days of determination of the fair market value.

Mr Howell’s employment was terminated for redundancy as at 3 February 2012.  The employer paid him his holiday pay up to that date.

There was a dispute between the parties as to the quantum of the incentive payment payable under the GIA.  It was not paid until this was resolved almost a year later, on 22 January 2013.  The incentive payment amounted to $3.2 million.

Mr Howell argued that, in accordance with the Holidays Act 2003 (Act), he was entitled to holiday pay in respect of the incentive payment as it was part of his gross earnings.  The amount of holiday pay in issue, $256,000 gross, was substantial.

Under the Act, all employees are entitled to at least 4 weeks’ paid annual holidays at the end of each completed 12 months of continuous employment.  If, however, as in Mr Howell’s case, the employment comes to an end before they have worked a full second or subsequent 12-month period of employment, the employer must pay out 8% of the employee’s gross earnings since the employee last became entitled to annual holidays.

An employee’s “gross earnings” are widely and non-exhaustively defined under the Act.  It means “all payments that the employer is required to pay to the employee under the employee’s employment agreement” (with some limited exclusions not relevant here).

In brief, the employer argued the Act should be interpreted as imposing an end point on the holiday pay calculation, meaning ‘gross earnings’ included only payments made up to and including the date of termination (and because the incentive payment was made after the termination date of 3 February 2012, it should not be included in any holiday pay calculation).

The Employment Court disagreed, finding in favour of Mr Howell.  Key points were:

• The incentive payment was payment for services provided during Mr Howell’s period of employment. By virtue of his entire employment period, Mr Howell had in fact earned the incentive payment, and his entitlement to it vested on the date of the termination of his employment.  It was simply that by virtue of the calculation formula based on share value, it could not be calculated and therefore paid out the exact date of termination of employment.

• The Court observed that Mr Howell’s situation was analogous to that of an employee who has earned income not capable of being exactly calculated at the termination date (but who would get holiday pay in any event on the same).  For example an employee who is entitled to commission on sales executed prior to employment ending but which for accounting reasons cannot be exactly calculated until after the date of employment; or the employee who is entitled to a non-discretionary productivity bonus not capable of calculation prior to termination.

• Under the Act, whether a payment is included in the employee’s gross earnings does not depend on when the payment was made, rather, on whether the employer was contractually required to pay it to the employee.  It would be illogical if, for example, an employee is deprived of holiday pay on a commission or bonus payment simply because it could not be calculated as at the last date of employment.

As a consequence, in addition to redundancy compensation and the $3.2 million incentive payment already paid to Mr Howell, the employer was directed to pay Mr Howell gross holiday pay of $256,000 plus interest.

We are fielding an increasing number of questions about holiday pay, particularly regarding bonuses, incentives and other irregular payments.  If you need any advice on holiday pay and your, or your employee’s, entitlements, please give us a call.