Discretionary vs Non-Discretionary Payments In New Zealand

If you run a small business, “pay” usually isn’t just wages. It’s also bonuses, commissions, allowances, incentives, and sometimes one-off thank you payments when someone’s gone above and beyond.

But here’s the catch: the way you describe (and actually use) those payments can change whether they’re treated as truly optional, or something your team is entitled to. That difference can affect everything from payroll disputes to holiday pay calculations and budgeting.

In this guide, we’ll break down discretionary vs non-discretionary payments in a practical, New Zealand-focused way, so you can reward staff fairly while keeping your legal foundations solid from day one.

This article provides general information only and isn’t legal advice. Because payment structures and leave/pay calculations can be very fact-specific, it’s worth getting tailored advice for your situation.

What Is The Difference Between Discretionary vs Non-Discretionary Payments?

At a high level:

• Discretionary payments are payments you may choose to make, at your genuine discretion, and that employees can’t demand as a contractual entitlement.
• Non-discretionary payments are payments an employee is entitled to if certain conditions are met (for example, they hit a target, work certain hours, or follow a documented scheme).

That sounds straightforward, but in real life the line can blur quickly. A payment can start off “optional”, and over time become something an employee reasonably expects (and may argue they’re entitled to), especially if:

• it’s mentioned in an employment agreement, incentive plan, or policy as something that will be paid once requirements are met
• you’ve paid it regularly in a consistent way (for example, every quarter)
• the calculation is fixed or formula-based
• managers talk about it as part of “total remuneration” or “OTE” (on-target earnings)

From an employer’s perspective, the key question is usually:

“Could an employee point to something in writing, a clear formula, or an established pattern and say they’re owed this?”

If the answer is “yes”, you’re likely dealing with a non-discretionary payment (even if you’ve labelled it “discretionary”).

Why Labels Aren’t Enough

In practice, what matters is the substance of the arrangement, not just the heading you’ve used.

For example, calling something a “discretionary bonus” won’t protect you if your contract says the bonus is payable when KPIs are achieved, and you’ve set objective KPIs with a clear measurement period. At that point, the payment starts to look non-discretionary.

This is exactly why having a properly drafted Employment Contract matters - it’s often the first document looked at if there’s a disagreement about whether someone is entitled to a payment.

Why This Distinction Matters For NZ Employers

Getting discretionary vs non-discretionary payments right isn’t just “nice to have”. It can affect your legal risk and your payroll obligations in a few big ways.

1) Avoiding Payment Disputes And Personal Grievances

If an employee believes they’re entitled to a payment and you don’t pay it, that can quickly turn into a dispute. Depending on the situation, it might also lead to a personal grievance claim (for example, if the employee argues the decision was unfair, inconsistent, or not made in good faith).

NZ employment relationships are governed by good faith obligations. That doesn’t mean you can’t have discretion - but it does mean you should exercise discretion honestly, fairly, and consistently, and not mislead staff about how payments work.

2) Budgeting And Cashflow Certainty

From a small business point of view, the biggest practical difference is predictability:

• If a payment is non-discretionary, you should plan for it like a real cost of employment (because it’s likely to become payable once conditions are met).
• If a payment is discretionary, you have more flexibility - but only if the arrangement is genuinely discretionary and documented properly.

3) Holidays Act 2003 And Holiday Pay Calculations

This is the one that catches many employers off guard.

In New Zealand, holiday and leave pay entitlements (including annual holidays and public holidays, and some other leave-related payments) are governed by the Holidays Act 2003. Whether particular extra payments need to be included in leave pay calculations depends on the specific statutory definitions and formulas (for example, concepts like “gross earnings”, “ordinary weekly pay”, and “average weekly earnings”).

While the Holidays Act doesn’t simply ask whether a payment is “discretionary” or “non-discretionary”, the practical risk is that payments which are regular, expected, or connected to the work an employee normally performs may need to be factored into leave pay calculations. That’s why it’s important to review incentive and allowance structures carefully and, if needed, get payroll or legal advice.

Common examples that may impact holiday pay calculations include:

• commission payments
• productivity or performance incentive payments
• regular allowances (depending on what they’re for and how they’re paid)

This is one reason it’s important to get specific advice if you’re paying incentives, overtime, or commissions - especially if you’re also trying to keep payroll compliant. If you’re unsure about hours and additional payments, our guide on Working Overtime can also help you spot common risk areas.

Common Examples Of Discretionary And Non-Discretionary Payments

Let’s make this concrete. Below are common payment types NZ employers use, and how they typically fall on either side (keeping in mind that wording and practice matter).

Discretionary Payments (Common Examples)

• One-off spot bonuses (e.g. a surprise $200 voucher or cash bonus after a tough month), where there is no promise or expectation of repeat payments.
• Discretionary profit share where you decide each year whether to pay anything, how much, and to whom, with no formula or commitment.
• Ex gratia payments (a goodwill payment), typically documented as being outside contractual entitlements.
• Ad hoc “thank you” payments that aren’t tied to measurable KPIs and aren’t a regular feature of the role.

Employer tip: If you want a payment to stay discretionary, avoid building a fixed formula, avoid repeating it on a predictable schedule, and avoid describing it as part of an employee’s expected remuneration.

Non-Discretionary Payments (Common Examples)

• Commission (e.g. X% of sales made), especially where there’s a clear calculation method and eligibility criteria.
• Guaranteed bonuses (e.g. “you will receive $1,000 if you achieve KPI A by date B”).
• Allowances that are payable when certain conditions are met (e.g. a tool allowance paid each week to employees required to provide their own tools).
• Overtime rates where your employment agreement states overtime will be paid at time-and-a-half after certain hours.

If your business pays commission or incentives, it’s worth having a dedicated document (not just a casual email chain). An Employee Commission Agreement can help you clearly define how commission is earned, when it’s paid, what happens with refunds/cancellations, and what occurs when someone resigns.

Grey Areas: Payments That Often Get Misclassified

Some payments sit in a “grey area” because employers intend them to be discretionary, but the business ends up creating an implied entitlement through how it operates.

Common examples include:

• “Discretionary” monthly KPI bonuses paid every month when targets are met (this can start to look like a non-discretionary incentive scheme).
• Retention bonuses promised verbally (verbal promises can still cause issues, especially if staff rely on them).
• Regular allowances that are paid like part of wages, even if they were originally intended to reimburse costs.

If you’re paying something regularly, it’s smart to pause and ask: are we comfortable treating this as an entitlement? If not, the structure probably needs tightening.

How To Structure Payments So They’re Clear (And Enforceable)

The best way to avoid confusion (and disputes) is to document payments properly from the start and keep your payroll practices consistent with what you’ve documented.

Step 1: Decide What You Want The Payment To Be

Before you draft anything, clarify internally what you want:

• Is this a reward you can choose to give (true discretion)?
• Or is this part of a performance-based remuneration model where staff can reliably earn extra pay?

Both approaches can work - but they should be built differently.

Step 2: Put The Right Terms In Writing

Your starting point is the employment agreement, plus any attached schedules or incentive plans. Clear drafting matters because vague wording can create risk.

As a general rule:

• For discretionary payments, the document should say the employer has discretion about whether any payment is made, the amount, and timing - and that the employee has no entitlement to receive it.
• For non-discretionary payments, the document should set out the conditions and the calculation method, including any exclusions (e.g. how returns, bad debts, or cancellations affect commission).

It also helps if your broader expectations around conduct, performance, and business processes are set out in a Workplace Policy or staff handbook, so you’re not reinventing the wheel every time a payment question comes up.

Step 3: Be Careful With “Discretion” Triggers

Many businesses use wording like: “a bonus may be paid at the employer’s discretion based on performance.”

This can still create arguments if you don’t define what “performance” means and you apply it inconsistently. You don’t need to turn discretionary bonuses into a strict formula - but you should be able to explain your reasoning if it’s challenged.

Practical ways to protect your position include:

• documenting that the business will consider factors like company profitability, team performance, and individual conduct
• confirming the payment isn’t guaranteed and may change from year to year
• avoiding promises like “you’ll definitely get this if you do X” unless you intend it to be non-discretionary

Step 4: Align Payroll Practice With The Paperwork

Even well-drafted documents can be undermined if your actual behaviour contradicts them.

For example, if you say a bonus is discretionary but you pay it automatically every quarter with a consistent formula, the “discretion” can start to look more like a label than a reality.

If you want to keep a payment discretionary, you should also keep your process discretionary in practice (including how decisions are recorded and approved).

Common Legal And Practical Pitfalls (And How To Avoid Them)

Most payment disputes don’t happen because an employer is trying to do the wrong thing. They happen because the business grows, the team changes, and the original “informal” approach stops working.

Here are some common pitfalls we see in small businesses.

Promising Payments Without Thinking Through The Consequences

A quick promise like “we’ll give you a bonus if you smash the next two months” can feel motivating in the moment, but it can also create an expectation that’s hard to unwind later.

If you want to incentivise performance, it’s usually safer to set up a defined scheme (non-discretionary) that you can administer properly, rather than rely on ad hoc promises.

Commission Plans That Don’t Cover Edge Cases

Commission structures often cause disputes when they don’t address questions like:

• When is commission “earned” - on invoicing, payment, delivery, or end of a warranty period?
• What happens if a customer cancels or gets a refund?
• What happens if the employee resigns mid-month or during a notice period?
• Does commission apply to existing clients, leads generated by marketing, or only new business?

These are exactly the types of details you’d build into an Employee Commission Agreement so your expectations are clear before money is on the line.

Using “Commission-Only” Models Without Checking Compliance

Commission-only pay can be risky if it means employees might earn less than minimum wage for hours worked, or if the arrangement isn’t documented clearly.

If you’re considering a commission-only structure, it’s worth checking your approach carefully and getting advice early. You may also want to review practical guidance like How To Pay Employees Commission Only to understand common compliance issues.

Performance Issues Managed Informally

Bonuses and incentives often intersect with performance management - for example, withholding a discretionary bonus due to conduct or performance issues.

If performance concerns are not documented and managed with a fair process, withholding payments can escalate into a broader dispute about fairness and good faith.

Having a clear process (and using it consistently) is key. This is where documents and guidance around Performance Management can play a big part in reducing legal risk.

Key Takeaways

• In practice, the difference between discretionary vs non-discretionary payments comes down to whether employees are genuinely entitled to the payment once conditions are met, not just what you call it.
• Payments can shift from “discretionary” to “expected” if you pay them regularly, use a fixed formula, or describe them as part of remuneration.
• The distinction matters for managing disputes, protecting cashflow, and staying compliant - including around how some payments may need to be treated in leave pay calculations under the Holidays Act 2003.
• Commission and incentives are common pressure points, so make sure the rules are clear (including edge cases like refunds, cancellations, and resignations).
• Strong written documents - like an Employment Contract and, where relevant, an Employee Commission Agreement - help protect your business and set expectations from day one.
• If you’re unsure whether a payment structure is truly discretionary (or you’re worried it’s become an implied entitlement), it’s worth getting tailored advice before a small issue becomes a bigger one.

If you’d like help setting up bonuses, incentives, or commission structures (or reviewing what you’re already paying), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.