Commission Based Payment? Holiday Pay Implications.
Does your pay structure have a commission element? You may be exposed to significant Holiday Pay claims – new Court of Appeal case.
A recent Court of Appeal case (Labour Inspector of the Ministry of Business, Innovation and Employment v Tourism Holdings Limited) has ruled against the employer in relation to how holiday pay must be calculated for employees who earn commission in certain circumstances.
The case concerned Tourism Holdings Limited, a company which operates a tour bus business in New Zealand. Tourism Holdings employs “driver guides” (bus drivers that also sell tourist activities provided by third parties; e.g., AJ Hackett’s bungee jumping). The driver guides were paid weekly in arrears at a daily rate for providing the bus tour services. On top of this, they were paid commission for any additional ‘activity’ sold to a passenger during a tour (e.g., a bungee jump). The driver would receive a lump sum payment of commission at the end of each tour, based on the number of additional activities that driver sold during that tour.
Under the Holidays Act 2003, when an employee becomes entitled to annual holidays, an employer must calculate:
(a) The employee’s Ordinary Weekly Pay; and
(b) The employee’s Average Weekly Earnings,
and then pay the employee the greater of the two amounts as the employee’s holiday pay.
Generally speaking, commission earned by employees is likely to fall into the calculation of their Average Weekly Earnings (because Average Weekly Earnings is defined as 1/52 of an employee’s gross earnings).
On the other hand, the Holidays Act 2003 sets out how to work out the employee’s Ordinary Weekly Pay. Section 8(1) of the Holidays Act 2003 states that Ordinary Weekly Pay means the amount of pay the employee receives under their employment agreement for an ordinary working week, which includes productivity or incentive based payments (including commission) if those payments are a regular part of the employee’s pay. What this means is that an employee’s commission will only be included in the calculation of Ordinary Weekly Pay if it is a “regular” part of their pay.
If it is not possible to determine an employee’s Ordinary Weekly Pay, then a four week averaging formula can be used. In accordance with this formula, the employer (1) takes the employee’s gross earnings for the four calendar weeks before the end of the pay period immediately before the calculation is made, (2) deducts any productivity or incentive-based payments that are not a regular part of the employee’s pay, and then (3) divides this by four.
In the Court of Appeal case, the parties agreed that because the number of working days for the driver guides varied each week, it was not possible to determine what the driver guide was paid for an “ordinary working week” (under section 8(1) of the Holidays Act 2003). Therefore, the Court was required to look at the averaging formula under section 8(2) of the Holidays Act 2003 and decide whether the employee’s commission should be deducted from gross earnings or not.
Tourism Holdings argued that commission was not a regular part of the employee’s pay and it should therefore be deducted from the employee’s gross earnings for the purposes of the s 8(2) calculation. The Labour Inspector argued that the employee’s commission payments were a regular part of their pay and should not be deducted.
The Court of Appeal preferred the approach of the Labour Inspector and decided that commission payments would be a regular part of the employee’s pay if they were made:
- Substantively regularly, being made systematically and according to rules; or
- Temporally regularly, being made uniformly in time and manner.
The Court of Appeal found that in this case, the driver guides’ commission was regular and habitual, and formed part of their pay in the week after the tour in which it was paid. Therefore commissions were included in the calculation of Ordinary Weekly Pay for the drivers’ by virtue of s 8(2) of the Holidays Act 2003.
What does this mean for you?
If you use the averaging formula under s 8(2) of the Holiday’s Act 2003 to calculate an employee’s Ordinary Weekly Pay and productivity or incentive-based payments (e.g., commission) are a regular part of that employee’s pay, then those payments may have to be included within that calculation for the purposes of determining that employee’s holiday pay.
This may mean that you have to pay your employees their holiday pay at a higher rate. Further, claims for wrongly paid holiday pay can stretch back for 6 years. This means employers may be liable to backdate wrongly calculated holiday pay for up to 6 years.
Whether you are required to back-pay staff or change the way you are paying your staff will depend on your particular circumstances and commission structure.
If you feel you could use some specialist advice, don’t hesitate to us.
