Supreme Court decision on commission payments and holiday pay

The recent Supreme Court decision in Tourism Holdings Ltd v A Labour Inspector of the Ministry of Business, Innovation and Employment [2021] NZSC 157 (“Tourism Holdings”) held that commissions can form part of an employee’s ordinary weekly pay for the purposes of calculating holiday pay if they are made substantively regularly and temporally regularly.

Holidays Act 2003
Under the Holidays Act 2003 (the “Act”) holiday pay must be at a rate based on the greater of two calculations: either the employee’s “ordinary weekly pay” as at the beginning of the annual holiday (s21(2)(a)(i) of the Act), or the employee’s average weekly earnings for the twelve months immediately before the annual holiday (s21(2)(a)(i) of the Act).

Commission is included in an employee’s “ordinary weekly pay” where it is a regular part of that pay. However, the Act recognises that some employees may not have an ordinary working week. The Act therefore provides an alternative way of calculating pay in section 8(2) of the Act.

The formula is as follows: (A-B)÷C where:

A= the employee’s gross earnings for either

• the four calendar weeks before the end of the pay period immediately before the calculation is made; or
• if the employee’s normal pay period is longer than 4 weeks, the pay period immediately before the calculation is made.

B= The total amount of payments described in s8(1)(c)(i) to (iii) which includes productivity or incentive based payments and commission that are not a regular part of the employee’s pay.

C= four (as in, to average the earnings in the four weeks considered).

The question for the Supreme Court in Tourism Holdings was what constitutes “regular” for the purposes of deciphering whether commission forms a “regular part of the employee’s pay”.

Tourism Holdings Ltd v A Labour Inspector of the Ministry of Business, Innovation and Employment

Tourism Holdings operates guided bus tours throughout New Zealand as part of their brand of offering tourists a “kiwi experience”. To do so, it employs “driver guides” who, in addition to their general duties, sell tourist activities through third party operators for which they are paid commission. Drivers only receive commission payments once a tour has finished and after they have completed certain administrative procedures required by Tourism Holdings. As drivers did not have a typical working week, the alternative calculation in s8(2) applies.

The Employment Court agreed with Tourism Holdings’ position that that driver guides’ commissions are to be deducted from the holiday pay calculation because they are not a regular part of the employee’s pay, and thus they fall within s8(1)(c)(i)-(iii) and part (b) of the equation. This was because the commission does not form part of the drivers’ pay for an ordinary working week, as was not earnt by a driver until the reconciliation process was completed. They effectively construed “not a regular part of the employee’s pay” as “not a regular part of the employee’s pay for an ordinary working week”.

However, the Court of Appeal and the Supreme Court overturned this decision. Both Courts emphasised that the purpose of the alternative calculation is to provide for situations where an employee may not have an ordinary working week. They held that, irrespective of whether commission forms part of an ordinary working week, it must be included when calculating ordinary weekly pay under s8(2) if it is a “regular” part of the employee’s pay. Thus, while commission payment may be insufficiently regular to effect the calculation of pay for an “ordinary working week” under s8(1)(a), it may be sufficiently regular to be material to a calculation of earnings over a four week period under s8(2)(a). Whether it is “regular” is to be construed in relation to the time period under consideration- four weeks for s8(2)(a), and one for s8(1)(a).

The Court of Appeal found that regularity can be in two ways: substantive regularity or temporal regularity. The Supreme Court clarified that both are required for commission to be considered in holiday pay calculation:

• Substantively regular, being made systematically and according to rules; and
• Temporally regular, being made uniformly in time and manner.

It was held that the bus drivers’ commission was regular.

Relevance for Employers
The decision confirmed that incentive based payments, including commission, forms a “regular part of the employee’s pay” under the Act if they are made substantively regularly and temporally regularly.

The significance of this decision is that the holiday pay rate calculated under s8(2) may be greater than if it was calculated under s21(2)(b)(ii) (ie. the employee’s average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday). This is only material when commission earnt in the four week period referenced in s8(2) is greater, as a component of ordinary weekly pay, than the 1/52 portion used to calculate “average weekly earnings” under s21(2)(b)(ii).

There was some concern from Tourism Holdings that employees may strategically time their annual holiday so as to maximise their holiday pay by taking leave after a particularly lucrative four weeks. However, the Court of Appeal dismissed this as a concern and also held that such a result would not be inconsistent with the scheme and purpose of the Act.

If you would like more information or advice on any relevant calculations for payment for holidays and your obligations as an employer, please do not hesitate to contact us.