In the Court of Appeal case of Labour Inspector v Tourism Holdings Limited  NZCA 1, ’driver guides’, employed by Tourism Holdings Limited (Tourism Holdings) claimed Tourism Holdings had short-changed them by omitting commission sums when calculating how much to pay them for annual leave.
Driver guides are paid weekly for basic driving and guiding services, but they also receive commission for selling activities to Tourism Holdings’ passengers.
Importantly, for this case, driver guides only receive their commission payments in a lump sum after a tour has finished.
Calculation of annual leave
Under the Holidays Act 2003 (Act), when an employee takes annual leave, they are entitled to be paid the greater of:
- Their ordinary weekly pay at the beginning of the actual holiday; or
- Their average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday.
In almost all cases, commission forms part of ‘average weekly earnings’, so employees are getting the benefit of commission in the annual leave calculation one way or another.
The inclusion of commission in ‘ordinary weekly pay’ is owever more complicated and can bump up the amount an employee receives if an employee receives a large commission sum shortly before going on leave.
To calculate ‘ordinary weekly pay’, where an employee does not work an ‘ordinary working week’, as in this case, employers are required to apply a formula, of:
- Taking the relevant employee’s ‘gross earnings’ over the 4 weeks before they go on leave; and
- Subtracting certain amounts, one of which is commission that does not form a “regular part” of an employee’s pay.
Crux of the dispute
If commission forms a ‘regular part’ of an employee’s pay and is not subtracted from the last 4 weeks of gross earnings, it means an employee could, theoretically, be ‘on to a winner’ if they received a large commission payment in the 4 weeks before going on annual leave.
Faced with that possibility, Tourism Holdings argued that driver guides’ commission payments are not regular and therefore must be subtracted from ‘gross earnings’ when working out how much to pay employees for annual leave. The Labour Inspector took the opposite approach and argued that the commission payments formed a regular part of the employees’ pay and so were not to be subtracted from gross earnings in the ‘ordinary weekly pay’ annual leave calculation.
The Court of Appeal preferred the interpretation of the Labour Inspector. The Court found that the commission payments are a ‘regular part of the employee’s pay’ if they are made:
- Substantively regularly, being made systematically and according to rules; and
- Temporally regularly, being made uniformly in time and manner.
The Court of Appeal believed that both meanings applied to commission earnt by the driver guides. The first option, ‘substantive regularity’ is logical. However, the second option, ‘temporal’ regularity seems a stretch, given the commission payments were not made on a weekly, monthly or other set timeframe and could be spread out at odd times over the year. The Court of Appeal seems to have worked their way around this by defining temporality by reference to proximity to the timing of the tour, rather than by reference to weeks or months of the year.
In our view, that goes too far. The fact that payments were made in the week after each tour, is a good reason for saying the payments are made according to a system and rules, and therefore made ‘substantively regularly’, but it is artificial to say that there is also temporal regularity when the ‘regularity’ has no link to weeks, months or other standard measures of time.
In any event, irrespective of any disagreement on our part, the Court of Appeal decision is binding law and it would be prudent for employers to review their annual leave calculations if they have employees whom do not work an ordinary working week and whom take home commission at varying times in the year. Please get in touch if you would like our assistance.
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