Posted on: Feb 02, 2021
A recent decision by the Court of Appeal has potentially changed the way employers calculate and pay annual holidays, after the meaning of the word “regular” was defined in the context of the Holidays Act 2003 (the Act). Specifically, the Court considered whether productivity or incentive-based payments should be excluded from the ordinary weekly pay calculation contained in s 8(2) of the Act.
The Court found that in some instances commission pay can be a “regular” part of the employees pay, as productivity and incentive-based payments. This judgement will change how Employers interpret the Holidays Act and may require changes to the way Employers calculate annual holiday payments, as it will mean that the ordinary weekly pay rate may potentially be a higher amount than the average weekly earnings if an employee is receiving commission.
If you are in charge of payroll and/or a business who pays their employees commission, we highly suggest you take note. See below to get the full breakdown of what the case is about, the legal questions and consequences.
Tourism Holidays Ltd (the Company) operate guided bus tours throughout New Zealand, employing “driver guides” (the Employees) who not only drive the buses but also act as tour guides for the customers aboard.
The Employees have various duties, however a predominate duty is to sell additional activities and tourist experiences to the Company’s customers whilst they are on tour. In exchange for successfully selling these activities and experiences, the Employees are paid a commission. The commission payment varies as it is dependent on whether the activity sold was one provided by the Company or a third party.
What is key in this case is that the Employees are only paid this commission once a tour has finished and they have completed certain administrative procedures. This means that they do not receive commission payments at the same time as they receive their weekly payment.
The Legal Question
The legal question is based on the interpretation of the word “regular” and how commission should be treated in regards to calculating holiday pay.
In New Zealand, once employees have completed 12 months of continuous employment, employees are entitled to no less than four weeks’ paid annual holidays. This annual holiday pay is determined by calculating both the rate of the employee’s “ordinary weekly pay” as at the beginning of the annual holiday and the rate of “average weekly earnings” for the 12 months immediately before the annual holiday. The amount of paid will then be the higher of those two rates.
However in this case, as the Employees have no regular working week due to the nature of their work and their pay rate changes on the tour they are conducting, as such, the usual “ordinary weekly pay” calculation cannot be performed. This triggers the alternative calculation of deducting certain factors, specifically productivity or incentive-based payments that are not a regular prat of the employee’s pay, from employees “gross earnings” to arrive at a total “ordinary weekly pay figure”.
The issue therefore was whether the Employees commission are productivity or incentive-based payments which are not a regular part of the Employees pay, and should be deducted from the gross earnings or whether commissions are a regular part of the Employees pay and should not be deducted from gross earnings.
If it were to be interpreted that productivity or incentive-based payments are a regular part of the Employees pay, this would mean that the weekly holiday pay rate calculated under this alternative calculation would potentially be greater than the “average weekly earnings” calculation.
The company argued that for commissions to be considered “regular”, it must be pay received under the employee’s employment agreement “for an ordinary working week”. It was stated that the commissions were only earnt once a debrief and reconciliation process has been completed. Therefore as it had no reference to what was earned for working an ordinary working week, the commission could be considered regular. The Employment Court agreed with this reasoning.
However the Labour Inspector argued that there is no proper basis for this approach, as the alternative calculation only exists because there is no ordinary working week. The qualifying concept should be regular, in the context of the phrase “a regular part of the employee’s pay”.
The Court of Appeal determined that the definitions of “regular” in this context were whether the payment was:
- Substantially regular: they are made systematically and according to rules; or
- Temporally regular: they are made uniformly in time and manner
As the Employees Individual Employment Contracts contain the “rule” of payment for commission, and the Employees had a pattern of trips they were responsible for, the Court found that commission was a regular and habitual part of their pay. It regularly formed part of the Employees pay in the week after the tour.
What does this mean going forward?
This case now raises some interesting questions regarding commission payments. Employers will now have to consider the patterns of the commission payments and whether it could be considered “regular”. This could put any Employers at risk of miscalculating their employees annual holiday pay and paying tham an incorrect sum, leaving them liable to a claim of breaching employees minimum entitlements.
It may also mean that the Court’s interpretation of “regular” changes how other payments, such as overtime, are calculated in accordance with the Holidays Act.
Practically speaking, this case means that if your employees receive commission payments, then you will need to review your payroll system to ensure that it is accurately calculating employees ordinary weekly pay to include commission payments according to these new rules.
The Holidays Act is incredibly complex, please get in touch with o ur team to ensure that you are getting it right.
Case name: Labour Inspector v Tourism Holdings Limited 2021 NZCA
This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.