Uncommon Sense

by Alxemy | Sep 17, 2021 | Legal

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

In a nutshell

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:

• Commissions are not a regular part of the employee’s pay
• Commission payments are not earnt by driver guides until the debrief and reconciliation process has been completed
• When so earnt, the commission paid is either not pay “for an ordinary working week” OR
• is not “regular”, as to be “regular” it must be pay received under the employee’s employment agreement “for an ordinary working week”
• That is, the phrase at s 8(1)(b)(i) and (c)(i), “a regular part of the employee’s pay”, is to be read as meaning “a regular part of the employee’s pay for an ordinary working week”
• If commissions were included, employees may act strategically and time their holidays to maximize their holiday pay

The Labour Inspectorate argues that the commissions should in fact be included, and gives the following reasons:

• The calculation called for under s 8(2) is required as there is no “ordinary working week”
• On that basis the Labour Inspector says it makes no sense, when calculating factor b, to do so as if s 8(1)(c)(i) referred to “payments that are not a regular part of the employee’s pay for an ordinary working week”.
• Rather, the qualifying concept used is simply “regular”, in the context of the phrase “a regular part of the employee’s pay”
• One of those circumstances (where 8(1) cannot be applied) is, as here, where there is no “ordinary working week”
• It would be surprising if a central element of the definition that does not fit, namely that of an “ordinary working week”, was in those circumstances to be reintroduced into the alternative calculation under s 8(2) as regards included and excluded commission.
• The interpretation the Labour Inspector supports is also consistent with the qualifying word “regular” in s 8(1)(c)(i). The dictionaries give us a number of meanings for the word regular. As relevant, the word means both (i) “conforming to a rule or principle; systematic”, or what might be called substantive regularity; and (ii) “acting or done or recurring uniformly or calculably in time or manner; habitual, constant, orderly”, or what might be called temporal regularity.

Context of The Act

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

8 Meaning of ordinary weekly pay

(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).

Analysis

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

The MBIE Guidelines on OWP

• “The word ‘regular’ should be read both in its literal sense (eg ‘weekly’) and in the sense of happening more often than not, but must also be read in the context of determining what an employee receives for an ordinary working week. If the employee generally works overtime every week, even if the days are different, the payment should be deemed regular for the purposes of OWP”
• “Anything that is likely to occur fortnightly, or otherwise regularly within a four-week cycle (or each month for monthly pay), should generally be included, even if the amount varies.”
• “These payments should either be apportioned evenly (if they do not relate to specific events that occur within the relevant period, for example, a payment for meeting a performance target) or assigned to the weeks in which they were earned (if they do relate to specific events that occur within the relevant period, for example, sales)”
• “For longer periods, the nature of the payment should be considered. If an incentive payment is paid only occasionally (eg quarterly) but is based on activity that takes place each week (eg a commission on individual sales) it generally should be included. However, if the payment relies on achieving say an annual target, (eg a certain percentage on a customer satisfaction survey), it would be less likely to be relevant for the OWP calculation.”

The MBIE Guidelines on “Money Earned vs Paid”

“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.”

Application

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.

• Do the drivers get paid commissions on a regular cycle, i.e. ever X weeks?
• What period of commissions “Earned” do those payments cover?
• Do Drivers actually receive commission payments with each payment cycle, or are there times they may receive nothing?

Using the “Paid” method

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

Using the “Earned” method

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.

Where is the logic?

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?

Conclusion

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.

Review of the Holidays Act

by Alxemy | Aug 4, 2021 | Legal

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.

Some key takeaways

• Annual leave must be held and taken / reduced in units or portions of weeks. It is good to see this be firmly stipulated in legislation for clarity. Hopefully this will mean that software vendors will ensure they comply with this.
• The definition of a week for employees with variable hours and no set rosters or contracted hours are to apply a 13-week average of hours worked to determine a week. Again, it is good to have a fixed method in which this can be calculated and know that it complies with new legislation. I would question, however, whether it is the most accurate way of determining a week in the absence of a roster or contracted hours and would argue that there are better ways and that in some cases this calculation will advantage and in others disadvantage employees.
• Two new rates are being introduced to calculate payment for annual leave.
  1. Ordinary Leave Pay – what the employee would have earned if they had been at work on the day(s) in question. This is one I am somewhat struggling with. Per proposed clarification we are meant to be calculating leave entitlements and reduction in weeks, we have 2 other weekly rates but this one needs to be worked out on a day by day basis. I would be concerned over how to calculate this in general, but even more so for variable employees and furthermore how to compare to the two other weekly rates to find the higher of the three.
  2. Average Weekly Earnings over a 13-week period
• Two new rates for calculating FBAPS leave, and employees should be paid the higher of the two
  1. Ordinary Leave Pay – what the employee would have earned if they had been at work on the day(s) in question. It is good to see some common rate calculations applied across Annual Leave and FBAPS leave. The concern here would be how this can be calculated for highly variable employees, for whom currently we only have to calculate ADP. Under the new proposal it means both rates would have to be calculated in all instances and the higher chosen.
  2. Average Daily Pay over the last 13 weeks
• The definition of Gross Earnings is made clear: “Include everything except reimbursements”. At least it will be easy to determine what should be included. It does mean, however that gross earnings will include more earnings than before and likely cause an increase in liability.
• What I like about this new proposal is that there will no longer be an ORD4 (section 8.2) calculation. With that we no longer have to worry about what is regular and what is not, and we no longer have to decide whether to use section 8.1 or 8.2
• Parental Leave returnees will now continue to be paid for their annual leave at the higher of the 3 proposed rates. This will simplify the process and make it easier to explain to employees how their leave is paid when they return. It does mean an increased liability to the company.

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.

Conclusion

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.

Casual or Permanent?

by Alxemy | Jul 18, 2021 | Legal

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.

Before we answer the question, let us look at why this matters so much

1. Casual employees are paid Annual Leave PAYG and do not become entitled to Annual Leave
2. Because there is no expectation of future work, and each engagement is short-term, there can be no grounds for a personal grievance in relation to dismissal
3. There are no guaranteed hours of work for casuals
4. If casuals do not work, they don’t get paid (apart from specific scenarios where FBAPS leave applies)

What is the potential impact of the above?

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

How do the employment courts determine a casual employment status?

“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:

• engagement for short periods of time for specific purposes
• a lack of regular work pattern or expectation of ongoing employment
• employment is dependent on the availability of work demands
• no guarantee of work from one week to the next
• employment as and when needed
• the lack of an obligation on the employer to offer employment or on the employee to accept any other engagement1
• employees are only engaged for the specific term of each period of employment.

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

Casual entitlement to FBAPS leave

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.

Conclusion

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.

Billion Dollar Holidays Act Nightmare for DHBs

by Alxemy | Jul 11, 2021 | Legal

“Systems haven’t been adapted properly for the Holidays Act, even though it’s been there since 2003.”

Let’s analyse that in relation to this post.

Here are some specific issues mentioned.

1. “One of the issues affecting midwives was the payroll system treating their 12-hour shifts as eight-hour shifts, which meant one-and-a-half days was deducted from their leave entitlement instead of one.” – This is the job of a rostering / time and attendance system. Most payroll systems are inherently unaware of shift patterns. To add to that, this is not a software coding issue but a configuration issue. Who is responsible? Well, we don’t know the ins and outs but at some point, someone will have had to draw up a requirements document, test, parallel run, sign of, oh and use the system for 18 years and only now it comes to light? Only one thing comes to mind – people, not systems or The Act.
2. “Annual leave was determined in weeks, not hours or days, which added complexity. The group had spent months trying to determine what a week was, Ovens said“ – Let’s wind back to the 2004 or 2005 when MBIE (then department of labour) had their first set of guidelines to the act released. Guess what? It explicitly allowed the use of hours. Do you think every payroll system in New Zealand would consciously write their software to be non-compliant? I don’t think so. In addition to this, weeks really is the most fair representation of “time off” and it really is not that hard – it is a case of pure maths. Who is the culprit here? I’d like to suggest MBIE themselves.
3. “A lot of midwives also picked up extra shifts but had not received the corresponding increase in annual leave entitlement.” – Had leave been accounted for in weeks as per the holidays act, this would become a non-issue. Regardless of how many shifts / hours you work, you get 4 weeks (per minimum legislation) – it’s that simple. This issue again points to the original guidelines from MBIE allowing for hours. Had weeks been enforced from day 1 of the act, the majority of the remediation issues would not exist today.
4. “Some boards had also not calculated employees’ gross earnings properly when they left or moved to another health board” – This is definitely not a system issue as all systems allow you to choose what to include in gross earnings. To get gross earnings right, it requires some homework to appropriately categorise all your allowances and set them up accordingly. People will have been involved at some stage to make a call on what to include and exclude.

Going back to the opening statement, yes many systems have not been adapted to calculating in weeks. One could say this has something to do with the original guidelines released by MBIE and from then on it seems to have become habit. Other than that, none of the other issues mentioned are system development issues but decisions and utilisation by people.

Who has to pay?

In the case of the DHBs, the government (ministry of Health) will be forking out the monies owed to employees. Could we use $1.15BIL in a better way? Sure!

• Hospitals are under-staffed
• Nurses are not paid enough in my view
• Some hospital buildings are appalling
• St. John is laying off staff as it cannot afford to operate

The problem is not that current and former staff are getting money back – they are owed this and deserve it. The issue is that millions of dollars are being paid to consultancy firms to help with the recalculations and also that the memorandum of understanding is far more favorable than the act itself. Yes, staff will get more money but guess what? So will the government in taxes.

No one talks about compliance going forward

Even with all that in mind, few actually talk about how systems and processes can be made compliant going forward. This is the real key because otherwise DHBs and all companies for that matter, may very well be non complaint again the very next day after paying their backpays.

We don’t need payroll systems, we need rostering, scheduling and strong time and attendance systems. These are key to accurately calculating in accordance with the act for complex environments like DHBs. Yes, payroll is important and has a lot of calculation to do as well but the best payroll system will not achieve compliance without a proper time and attendance and award interpretation engine.

What we also need is competent people owning payroll. It appears no one at these organisations themselves is at fault here, it is always a system or The Act. People should be held accountable and the profile of payroll and the importance of getting it right needs to be raised to one of the most important functions in a business.

Billion Dollar Nightmare