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
Overview
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.
In a nutshell
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:
- Seeks determinations that for the purposes of calculating payments to each of the defendants pursuant to sections 49, 50, 60 and 71 of the Act for each day of Other Leave that is taken by them under the Act
- The plaintiff is permitted to pay the defendants their RDP as calculated under section 9 of the Act; and
- That each defendant’s RDP is correctly calculated under s9 of the Act
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:
- Have pleaded as affirmative defences that, through usage, leave taken was calculated according to ADP as against RDP and accordingly, has become incorporated into the contractual terms
- Alternatively, the defendants raise affirmative defences that the facts as pleaded constitute a waiver or give rise to an equitable estoppel and/or estoppel by convention, given mutual assent to a common assumption as to the relevant facts such that it would be unjust to allow GD Tauranga to unilaterally go back on a mutual assumption.
- In addition to their affirmative defences, the defendants have included a counter-claim requiring payment of losses suffered by way of wage arrears during the period when the plaintiff has made payment for the leave based on RDP rather than ADP
Context of The Act
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).
Discussions
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.
Analysis
If we look at Section 9 and 9A of the Holidays Act 2003, the intention here is that
- Employees are not worse off when they take any form of FBAPS leave
- Section 9A provides for cases where employees work variable hours or earn variable income, making it impossible or impracticable to determine RDP
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.
Application
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.
Important Notes
- As a company, you are responsible for ensuring compliance (whether that be over or under compliance). Make sure you understand what is required and apply this correctly.
- If you do not have the internal capacity to do so, make sure you choose a vetted and proven partner with sound knowledge and/or get independent legal advice
- Always try first to determine Relevant Daily Pay. Even if someone is waged or their pay fluctuates within a period, if you have a solid rostering / scheduling system working with an award interpretation engine, then chances are you will know what they would have earned that day and be able to calculate it (automatically even)
- If you do have to use ADP, beware of situations where employees work hugely varying hours on different days. E.g., if an employee works 2 hours on a Monday and 10 hours on a Tuesday, chances are their ADP rate will be vastly higher than a normal 2-hour day and vastly lower than a 10-hour day. Consider whether it may be possible to determine RDP, or as a fallback (although not legislated), you could compare their ADP rate to their roster x base rate and pay the higher
- If you are paying ADP, you only have to pay ADP! That means, any earnings that are already included in the ADP rate calculation do not need to be paid in addition to this. An example might be higher duties. If included in gross earnings (which it should be), there is no need to pay higher duties on top of ADP on a sick day. Beware however, if you decide to pro-rata permanent allowances when someone takes FBAPS leave to avoid double dipping, make sure you are not in breach of contract in regards to how it states that the allowance is to be paid. E.g., if the contract says you will be paid $500.00 per month and does not have a clause regarding the impact of leave on this allowance, then you cannot simply start to pro-rata the allowance. Such change will require consultation, amendments to contracts and unions if such are involved.
- Do not hard code into your employment agreements at what rate employees will be paid for FBAPS leave unless this is to be an agreed rate which complies with section 9(2). Notably, we have never seen this in use. The main reason for that is, in order to be able to determine whether the agreed rate is higher, we still have to be able to determine RDP, which defeats the purpose.
- You cannot contract out of law, meaning regardless of what you write into your contracts, the minimum you are required to comply with is the Holidays Act. Therefore, if you said in your agreements that employees will be paid base rate for all leave and employees sign this, that will nullify that specific clause, which will be superseded by the Holidays Act. It will not, however, render the contract as a whole invalid.
Conclusion
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.