The Court of Appeal (Court) has recently released its decision in A Labour Inspector of the Ministry of Business, Innovation and Employment v Tourism Holdings Limited which considered the calculation of ordinary weekly pay under the Holidays Act 2003, where a productivity or incentive-based payment, such as commission, forms a “regular” part of an employee’s pay.

Background

Tourism Holdings Ltd (THL) operates guided bus tours throughout New Zealand and employs “driver guides” that both drive the buses which carry THL’s customers on its tours and act as the customers’ guides for those tours. The tours vary in length between seven and 31 days.

The driver guides have a variety of duties, one of which is to sell tourist activities, whilst the customers are on tour.

In consideration for performing their general duties, driver guides are paid weekly in arrears at a daily rate whilst on tour. In exchange for their particular work of selling tourist activities, driver guides are also paid commission.  

The driver guides are not paid commission whilst they are on the tour as part of their weekly pay. Rather, they receive lump sum payments of commission for each tour, once a tour has finished and after they have completed certain administrative procedures required by THL.  

The Holidays Act 2003

Under section 21(2) of the Holiday Act 2003 (Act), an employer must calculate both the rate of “ordinary weekly pay” at the beginning of the annual holiday and the rate of “average weekly earnings” for the 1/52 of an employee’s gross earnings, for the period immediately before the annual holiday. Holiday pay is then to be calculated by reference to the higher of those two rates.

Section 8(1) of the Act provides that ordinary weekly pay means the amount of pay an employee receives under his or her employment agreement for an ordinary working week. If it is not possible to determine an employee’s ordinary weekly pay, the pay must be calculated in accordance with “a – b” / “c”, where: “a” is the is the employee’s gross earnings for (i) the 4 calendar weeks before the end of the pay period immediately before the calculation is made; or (ii) if the employee’s normal pay period is longer than 4 weeks, the pay period immediately before the calculation is made, “b” is the total amount of payments described in subsection 8(1)(c)(i) to (iii) and ”c” is 4.

The factors in section 8(1) include productivity or incentive based payments (including commission) if those payments are a “regular” part of an employee’s pay.

Whether the commission payments paid to the driver guides were a regular part of their pay was the focus of this appeal.

The parties agreed that the commission received by the driver guides should be included in the calculation as part of factor “a” (ie it is part of driver guides “gross earnings”). However, the parties disagreed on whether the commissions were a regular part of the employee’s pay.

The Employment Court decision

The Employment Court held that the commission payments were not a regular part of driver guides’ pay because they did not form part of their pay for an ordinary working week, as the driver guides were not paid the commission as part of their weekly pay. Agreeing with the position taken by THL, the Employment Court held that the phrase “a regular part of the employee’s pay”, was to be read as meaning “a regular part of the employee’s pay for an ordinary working week” both where an employee has an “ordinary working week” and where they do not (under s 8(2)). The Employment Court held what was to be included or excluded from the calculation by section 8 of the Act was designed to enable a calculation “representative of an ordinary working week”.

The Labour Inspector appealed. 

The Court of Appeal decision

In allowing the appeal, the Court held that the purpose of the alternative approach found in section 8(2) is to provide for the calculation of “ordinary weekly pay” where the definition found in section 8(1) cannot be applied. One of those circumstances was, as in the case being considered, where there is no ordinary working week.

In relation to the qualifying word “regular” in section 8(1)(c)(i), the Court considered dictionary meanings for the word regular applied to commission as earnt by the driver guides. The Court held that payments are “a regular part of the employee’s pay” if they are made:

1. substantively regularly, being made systematically and according to rules; or
2. temporally regularly, being made uniformly in time and manner.

If productivity or incentive-based payments are a regular part of an employee’s pay, those payments must be included when calculating ordinary weekly pay under section 8(2) of the Act. This was irrespective of whether the payments were part of pay for an ordinary working week (in the driver guide scenario the payments did not as there was no ordinary working week given the varying length of the tours).

While the commission payments were not part of the payment of daily rate compensation for each week, the Court held that it did form part of pay in the week after the tour when it was paid, and commission was paid regularly. This meant that the driver guide’s commission payments were regular payments and therefore not to be deducted as part of factor b in the section 8(2) formula.

The practical significance of this interpretation will only be seen when commission (or any productivity or incentive-based payments) earnt by an employee in the four-week period (part “c” of the formula), as a component of ordinary weekly pay calculated under section 8(2), is greater than the 1/52 portion of gross earnings used to calculate average weekly earnings.

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