The New Zealand Holidays Act legislation is complex to say the least. We’re here to make it easier. Over the coming months we will release mini videos covering specific areas of the Holidays Act in bite sized chunks, to help you better understand how it works.
Here is the first edition, covering the calculation of the Average Weekly Earnings (AWE) rate
Please note, this is an opinion piece, providing a logical assessment, based on practical experience in dealing with these matters on a daily basis. We are not lawyers and this post should not be seen as legal advice. Please refer to The Case for details and context
To provide some perspective and background, GD Tauranga is a building company that sells house and land packages. The three defendants are (at the time of this case) employed as sales consultants. Their remuneration is made up of a base salary equivalent to minimum wage x 40 x 52 and in addition to this they receive commissions for selling house and land packages. The commissions are deemed to have accrued on the day when the deal goes unconditional.
Since 2013, as advised by their external accountants who ran the payroll, GD Tauranga have been paying sales consultants using Average Daily Pay for their FBAPS (other) leave. When they hired an internal accountant, this was questioned and subsequently changed to Relevant Daily Pay.
It should further be noted that employment contracts stated that for Public Holidays and Bereavement Leave they will be paid Relevant Daily Pay but for sick leave states they are “entitled to sick leave in accordance with the Holidays Act 2003”. It does not specifically appear to mention Alternative Holidays.
This case was initially raised with the ERA but then referred to the Employment Court, because it’s ruling would have ramifications for the wider industry and similar roles in other industries.
The plaintiff:
GD Tauranga are calculating the Relevant Daily Pay for the defendants as their daily base rate and, if a commission payment falls due on that day, pays them the full commission payment.
The Defendants:
Now that we have a very high level view of the background and arguments, lets put some context to the Sections of the act that are referred to in the case
9 Meaning of relevant daily pay
(1) In this Act, unless the context otherwise requires, relevant daily pay, for the purposes of calculating payment for a public holiday, an alternative holiday,
sick leave, bereavement leave, or family violence leave,—
(a) means the amount of pay that the employee would have received had the employee worked on the day concerned; and
(b) includes—
(i) productivity or incentive-based payments (including commission) if those payments would have otherwise been received had the employee worked on the day concerned:
(ii) payments for overtime if those payments would have otherwise been received had the employee worked on the day concerned:
(iii) the cash value of any board or lodgings provided by the employer to the employee; but
(c) excludes any payment of any employer contribution to a superannuation scheme for the benefit of the employee.
(2) However, an employment agreement may specify a special rate of relevant daily pay for the purpose of calculating payment for a public holiday, an alternative
holiday, sick leave, bereavement leave, or family violence leave if the rate is equal to, or greater than, the rate that would otherwise be calculated under subsection (1).
(3) To avoid doubt, if subsection (1)(a) is to be applied in the case of a public holiday, the amount of pay does not include any amount that would be added by virtue of section 50(1)(a) (which relates to the requirement to pay time and a half).
9A Average daily pay
(1) An employer may use an employee’s average daily pay for the purposes of calculating payment for a public holiday, an alternative holiday, sick leave, bereavement leave, or family violence leave if—
(a) it is not possible or practicable to determine an employee’s relevant daily pay under section 9(1); or
(b) the employee’s daily pay varies within the pay period when the holiday or leave falls.
(2) The employee’s average daily pay must be calculated in accordance with the following formula:
a / b
where—
a is the employee’s gross earnings for the 52 calendar weeks before the end of the pay period immediately before the calculation is made
b is the number of whole or part days during which the employee earned those gross earnings, including any day on which the employee was on a paid holiday or paid leave; but excluding any other day on which the
employee did not actually work.
(3) To avoid doubt, if subsection (2) is to be applied in the case of a public holiday, the amount of pay does not include any amount that would be added by virtue
of section 50(1)(a) (which relates to the requirement to pay time and a half).
This case centres on the meaning of the word “may” as it appears in s 9A(1), and whether GD Tauranga retains a discretion to pay RDP when it is still possible to calculate RDP, but the pay varies within the pay period when the other leave falls. In other words, whether use of the word “may” in the section requires payment of ADP when either one of the circumstances in s 9A(1) exist. Is the use of the word “may” in this context permissive or empowering or does use of the word “may” mean “must”?
GD Tauranga’s position is that in this case it is possible and practicable to calculate RDP. This is so even though the employees’ daily pay varies within the pay period when the other leave falls. In such circumstances GD Tauranga submits that it is entitled to elect whether to pay RDP or ADP. This discretion, it submits, arises under s 9A by use of the word “may”. That discretion is then incorporated into the employment agreements, which provide that other leave is to be “in accordance with the Holidays Act”.
The defence, however, argues that their position on this point is that even if it is possible and practicable to calculate RDP, if the pay varies then s 9A requires ADP to be paid. In other words, use of the word “may” in s 9A(1) does not vest a discretion in GD Tauranga but is used in a mandatory sense. If one of the circumstances specified in s9A(1) exists, then ADP is to be paid.
The court then goes on to analyse Parliamentary materials, including explanatory notes for the Holidays Act Amendment Bill 2010 which introduced s 9A. As part of the amendment, the wording was specifically changed to “may”, indicating the intention that discretion can be used when deciding on RDP or ADP and whether either RDP cannot be determined or the pay fluctuates.
If we look at Section 9 and 9A of the Holidays Act 2003, the intention here is that
Relevant Daily Pay means the amount an employee would have received, had they been at work on the day in question. Average Daily Pay constitutes 52 weeks’ Gross earnings as defined in Section 14, divided by the whole number of actual or part days worked over the same period, giving an average daily rate that may be used as an alternative.
The intention of these sections is not to pay someone substantially more on an FBAPS leave day than what they would otherwise have earned, which would be the case for these Sales positions.
In the case of the sales consultants working for GD Tauranga, it is possible to determine RDP. We know they work 8 hours a day and we know what rate they are paid at. Further, we know what commission amounts they are due. Therefore, if GD pay them both of these amounts as they are due, then they will comply with S9.
One very important factor in these or similar situations is whether the taking of any form of FBAPS leave would have a negative impact on the commission that is earned. In the case of selling house and land packages, these are usually longer term deals and taking a day of sick leave will not impact the amount able to be earned.
On the other hand, however, is an employee is a shop assistant and earns commissions on everything they sell at the till, if they are not at work for a day, they will not be able to earn any commissions. It would also be impossible to know what commissions they would have earned on the specific day in question. In these cases it is therefore possible to use Average Daily Pay instead, to ensure the employee is not worse off.
We have also seen companies still paying relevant daily pay in situations where sales depend on their presence at work, however where they have calculated a nominal amount of commissions earned on other days and added this to their Relevant Daily Pay calculation. As long as it can be evidenced that the employee is not any worse off, this would still be an acceptable calculation.
In this case, the court ruled that GD Tauranga do in-fact have the discretion to pay either RDP or ADP:
In the present case it is possible for GD Tauranga to calculate RDP even though the employees’ daily pay varies within the pay period when the other leave falls, but as indicated from the authorities and materials relied upon, in that situation the employer has a discretion as to whether it applies RDP or ADP. We can see no impediment to GD Tauranga altering the previous method of payment from ADP back to RDP. That discretion vests in the employer in this case. Indeed, it is conceivable that a need arises for an employer to change between RDP and ADP for other leave on a reasonably regular basis if the employment circumstances periodically change such that calculation of RDP becomes neither possible nor practical and s 9A comes into effect. That has not occurred in the present case, but as Minister Wilkinson stated in the parliamentary debates, the ability is there as a means of reducing compliance costs if an employer finds difficulty in calculating RDP or the daily pay varies to such an extent that calculation of RDP for the other leave is too complex to be cost efficient.
We agree with this ruling and find that logic has prevailed.
Be practical, be pragmatic, simplify, automate, all while acting in good faith.
Lord Diplock said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios: “… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.”
In this post I will analyse some of the findings of the case Labour Inspector vs Tourism Holdings Ltd (The Company), court of appeal hearing from 24 September 2020.
Please note, this is an opinion piece, providing a logical assessment, based on practical experience in dealing with these matters on a daily basis. We are not lawyers and this post should not be seen as legal advice. Please refer to The Case for details and context
This case is to determine whether commissions earned by Driver Guides, should be included in the calculation of Ordinary Weekly Pay, as defined in Section 8 of the Holidays Act 2003.
The Company argues that commissions should not be included, for the following reasons:
The Labour Inspectorate argues that the commissions should in fact be included, and gives the following reasons:
Now that we have a very high level view of the arguments, lets put some context to the Sections of the act that are referred to in the case
(1) In this Act, unless the context otherwise requires, ordinary weekly pay, for the purposes of calculating annual holiday pay,—
(a) means the amount of pay that the employee receives under his or her employment agreement for an ordinary working week; and
(b) includes—
(i) productivity or incentive-based payments (including commission) if those payments are a regular part of the employee’s pay:
(ii) payments for overtime if those payments are a regular part of the employee’s pay:
(iii) the cash value of any board or lodgings provided by the employer to the employee; but
(c) excludes—
(i) productivity or incentive-based payments that are not a regular part of the employee’s pay:
(ii) payments for overtime that are not a regular part of the employee’s pay:
(iii) any one-off or exceptional payments:
(iv) any discretionary payments that the employer is not bound, under the terms of the employee’s employment agreement, to pay the employee:
(v) any payment of any employer contribution to a superannuation scheme for the benefit of the employee.
(2) If it is not possible to determine an employee’s ordinary weekly pay under subsection
(1), the pay must be calculated in accordance with the following formula:
(a − b) / c
where—
a 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, that pay period immediately before the calculation is made
b is the total amount of payments described in subsection (1)(c)(i) to (iii)
c is 4.
(3) However, an employment agreement may specify a special rate of ordinary weekly pay for the purpose of calculating annual holiday pay if the rate is equal to, or greater than, what would otherwise be calculated under subsection (1) or subsection (2).
As outlined in the case, we can readily assume that the Commissions in question for part of the definition of Gross Earnings under Section 14 of The Act (represented here as (a) in the formula under section 8(2). We can also assume that, to calculate Ordinary Weekly Pay for these Drivers, we have to use Section 8(2). The parties have agreed on this.
The key question is whether the Commissions can be deducted from the Gross Earnings to be used for the calculation of OWP, represented by (b) in the formula under section 8(2).
If we look at what Section 8 of The Act is trying to achieve, we can deduce that the intent is to come up with a dollar value that represents what an employee would ordinarily earn in one week. “Week” is not defined anywhere in The Act, therefore it must be assumed that a week is defined as a calendar week i.e., 7 days.
The Act allows for two means of calculating this. Section 8(1) is used where it is clear what an employee earns each week, for example salaried staff with no varying income, and section 8(2) is used where it is not possible to determine that value and provides a formula of (Gross Earnings – Irregular Earnings) / 4.
Gross Earnings is fairly easy to determine, and we have already agreed that the commissions form part of this definition and the divisor of 4 is very clear also. The only variable that is therefore left, is whether the commissions should be deducted from Gross Earnings or not.
This is not a simple task. To make this assessment, we refer to the guidelines published by MBIE in 2017. The following quotes are taken verbatim from these guidelines
“Consider a situation in which an employee receives a base salary with commission payments made quarterly. These commission payments relate to weekly sales, and so should be considered as ‘regular’.
Under a ‘money paid’ approach, if the quarterly payment fell within the four-week assessment period, the annual holiday pay calculation could be inflated, though if it fell outside the four-week assessment period, the holiday pay calculation would only be based on the employee’s base pay.
Under a ‘money earned’ approach, only the portion of the commission that arose from sales during the four-week assessment period would be considered for the calculation. A sensible approach in this kind of situation is to take a “money earned” approach, and it is important that this approach is taken in a principled and consistent manner and that the employer is open and transparent with the employee.”
Let us now apply these definitions to the case of the Tourism Holdings Drivers’ commissions.
There is some omission of information from the Case, which would be crucial to the determination of the outcome. That is, a detailed analysis of how and when Drivers are paid their commissions.
If we are to include the commissions in Gross Earnings for OWP on a “Paid” basis, these have to be able to be related to a 4-week maximum period. I.e., commission amounts paid should cover periods no longer than 4 weeks and should be paid at least within every or most 4-week cycles.
If commissions relate to periods longer than 4 weeks, including these in a 4-week calculation would inflate the resulting rate inappropriately. E.g., if we divide 8 weeks of commissions by 4, then we are in essence doubling the value of the commission included. Conversely, if the 4-week period relates to a period that does not contain any commission payments, the OWP rate would exclude commission entirely.
Therefore, commissions relating to longer periods could only be included on the “Earned” basis and would have to be associated to each corresponding week, i.e., the week during which they were earned.
In the case of Tourism Holdings, we have to assume that commissions are not paid on a “regular” cycle, and do not cover the same period length each time, given the nature of the trips that result in the leads, their varying lengths and the time it then takes to carry out the necessary administrative work to calculate the commission and pay the employees.
On that basis, we have to assume that the “Paid” option is not feasible because it cannot be accurately determined which length of time each payment relates to and this length of time can also change from payment to payment and employee to employee
If we then look at the earned method, this requires the ability to know when exactly each component of a driver’s commission was earned, so that this can be appropriately allocated to the week in which it was earned.
The question then arises: “Did they earn the commission when they submitted the lead, when lead actually converted and it become known how many people were in attendance, when the commissions were calculated or when they were finally paid?”
We have already ruled out the “Paid” option, so let’s assume we have to use the “attendance” option to apportion the commission.
Let’s say on 1 June 2021 a driver submits a lead for 4 people. This lead then converts on 25 June and only 2 people attend. The third party then calculates the value of this commission on the 20th of July 2020 and THL pays the employee for that particular portion of the commission as part of the employee’s commission payment on the 4th of August.
So we have assessed we cannot use the “paid option” and for the earned option, the actual value of the commission only became known 4 weeks after it was “earned”.
Now let’s say the employee takes leave between those two dates. How would the commission that was “Earned” on the 25th of June be able to be incorporated in the 4-week Ordinary Weekly Pay calculation under section 8(2), for leave taken any time before the 20th of July when the figure does not even exist by then?
So, although the arguments of the labour inspector are technically sound, how is this meant to be practically implement by THL? Aside from the timing delays and varying lengths covered that make it near on impossible to calculate in time for potential leave transactions, even if this was all done manually, how would a payroll system be able to handle this?
If we took a pragmatic approach to the case of these commissions, is that not the purpose of the 52-week Average Weekly Earnings rate, to capture these and ensure employees are compensated for additional and varying earnings?
Why do we need to complicate the attempt of calculating the OWP 4-week rate by trying to make payments fit into this calculation that actually technically don’t, practically don’t and are from a timing and systematic perspective impossible to accommodate?
In my view, nothing that does not get paid either with every pay or at least within every 4-week cycle should be included in the Ordinary Weekly Pay calculation, that is the whole reason why we have a 52-week rate to compare it to.
If we were to include a quarterly commission payment in OWP, we would need to find some means to appropriately apportion it to 4-week blocks and by the time this happens, any leave that would have taken those blocks into account when calculation the OWP rate, would have long been processed.
Can we just get to a point where legal arguments use logic and business sense when reaching outcomes? As much as some rulings may be correct on a technical basis, such may be impossible to implement and apply, and will likely result in companies remaining non compliant with such rulings, even though they are doing the right thing.
Be practical, be pragmatic, simplify, automate, all while acting in good faith.
By now, almost every New Zealander will have had some level of experience with the Holidays Act 2003. Whether working in Payroll, HR or Finance or being an individual who has been impacted by miscalculations.
You may also be aware that there has been a taskforce in place for some time, working on the review and subsequent recommendations to improve the act by simplifying it and providing better guidance on how to apply it.
Here is the latest from the MBIE website and below we take a peek into some of the proposed changes and what they could mean for organisations.
There are several other (22 in total) recommendation from the taskforce. The above page and the various documents accompanying it are worth a read if you’d like to get a heads up on these matters.
There are definitely some areas that will become a lot clearer given these proposed changes. This will, however come along with increased cost to businesses, not only from a liability perspective but also from a system and people change management perspective.
I can only hope that the change will be approached methodically and that there will be very clear guidelines on how the transition is to work, what compliance looks like under the new legislation and what needs to be done to rectify any historical miscalculations to put this to rest once and for all.
One thing is for sure. The payroll landscape is ever-changing, and we all need to make sure we are well educated and ready to deal with it.
The question seems simple; however we see this being answered incorrectly time and time again, with the potential effects not only disadvantaging the employee, but also bearing unnecessary costs to the employer.
With remediation work and having read many Enforceable Undertakings, if a casual is not a true casual, they should become entitled to annual leave. MBIE will then require that the employee be granted back any leave they should have become entitled to from the date they are deemed to have become permanent. The company can, however, not claim back any of the PAYG already paid to the employee, hence bearing double the cost effectively.
If employment courts deem an employee a not to be a casual, then that employee can have grounds for unfair dismissal and a whole range of other rights they would not have had as a casual.
Because zero-hour contracts are no longer legal (since 2016), if an employee is not deemed to be casual, they must be guaranteed a certain minimum number of hours.
Non-Casual employees should always be entitled to FBPAS leave per the holidays act 2003
“In the absence of any definition of casual employment in the Employment Relations Act 2000 the Courts have assessed whether employment is casual against the following characteristics:
The question of whether or not a person has been employed as a casual employee depends on the mutuality of the intention at the outset of the employment and the nature of the work including its regularity, its hours and the obligations imposed on the employee.”
Casual work can evolve because of employer oversight into permanent employment, such as replacing an employee on long term leave. A case that related to this situation is Muldoon v Nelson Marlborough DHB
This falls under the Holidays Act 2003, and although the act does not talk about casual employment specifically, the following rules may be applied as they will likely affect casual workers (Taken from Section 63 of the Holidays Act). Also applies to Family Violence Leave (Section 72D).
Entitlement to sick leave and bereavement leave
(1) An employee is entitled to sick leave and bereavement leave in accordance with this subpart—
(a) after the employee has completed 6 months’ current continuous employment with the employer; or
(b) if, in the case of an employee to whom subsection (1)(a) does not apply, the employee has, over a period of 6 months, worked for the employer for—
(i) at least an average of 10 hours a week during that period; and
(ii) no less than 1 hour in every week during that period or no less than 40 hours in every month during that period.
As you can see, the answer to this question can bear large impacts on both employees as well as employers, so getting it right is important.
We recommend that, if you do not have something in place to monitor this, you engage with your payroll or time and attendance software vendors to see how they can help you monitor and report on casual employment.
This is something that requires ongoing monitoring and adjustments to payroll settings in order to be compliant and cannot be seen as a set and forget configuration.
