Annual holiday pay is calculated at the rate that is the greater of the employee’s ordinary weekly pay at the beginning of the annual holiday or average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday. In circumstances when it is not possible to calculate an employee’s ordinary weekly pay under s 8(1) of the Act, the alternative way of calculating ordinary weekly pay is set out at s 8(2) of the Act. This is often referred to as the ‘OWP 4 week formula’ or ‘OWP2’, and many payroll systems are set to use this as the default.
The 4 week formula for s 8(2) of the Act is:
a − b
a is the employee’s gross earnings for—
- the 4 calendar weeks before the end of the pay period immediately before the calculation is made; or
- 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 8 (1)(c)(i) to (iii) of the Act which are a list of payments that are not a regular part of the employee’s pay.
c is 4.
The Employment Court’s Decision
The Employment Court considered whether certain commission payments earned by tour bus drivers under their employment agreements were a “regular part” of their pay for the purpose of the 4 week formula for ordinary weekly pay in the Act. If so, they would need to be included in the calculation of ordinary weekly pay using the 4 week formula.
The bus tours were of varying length. The drivers, who also acted as tour guides, were entitled under their employment agreements to a daily rate of pay. They were also entitled to commission derived from bookings that they arranged for passengers for side activities with third party operators which were accounted for by the third party operators to the employer. Payment of commission to the drivers depended on: certain steps being taken; various documentation requirements being satisfied; and a commission reconciliation and driver debriefing which took place at the end of each tour.
The Employment Court held that the commissions earned were not part of the drivers’ ordinary weekly pay under s 8(2). It considered that “regular” in the section is intended to mean what is received under the employment agreement for an ordinary working week. The employer could not ascertain what commission-related activities had been booked, paid for, and undertaken by passengers in a weekly period.
The Court of Appeal’s Decision
The questions of law submitted for determination on appeal were:
- What is the meaning of “not a regular part of the employee’s pay” in s 8(1)(c)(i) of the Act for the purposes of calculating ordinary weekly pay under s 8(2) of the Act?
- If productivity or incentive-based payments are a regular part of the employee’s pay, do these payments have to be “pay the employee receives under his or her employment agreement for an ordinary working week” for the purpose of calculating ordinary weekly pay under s 8(2) of the Act?
The Court of Appeal accepted the parties’ view that the 4 week formula for OWP was appropriate because employees worked different work periods on tours. It focused on whether or not the commission payments made to the bus drivers were a regular part of pay because there was no “ordinary working week” for the bus drivers in question.
It found that while commission payments will always be included in average weekly earnings, commission payments are only included in ordinary weekly pay where they are a regular part of that pay.
To guide its interpretation of “regular” it turned to dictionary definitions. It found that payments are “a regular part of the employee’s pay” if they are made: (i) substantively regularly, being made systematically and according to rules; or (ii) temporally regularly, being made uniformly in time and manner. The Court of Appeal did not consider the analysis was constrained by payment in or for a week, and focused on whether commission was a regular feature of pay.
The Court of Appeal held that “commission is a regular and habitual part of their pay”.
What this means for Employers
Check to see if your payroll system has been configured to use the OWP 4 week formula. If so, do you need to use the 4 week formula or can ordinary weekly pay be calculated in the ordinary way? If you do need to use the 4 week formula the Court of Appeal’s decision means that if productivity or incentive-based payments are a regular part of the employee’s pay, whatever the pay period is, they need to be included for the purpose of calculating ordinary weekly pay under s 8(2) of the Act.
If you have any questions about annual holiday pay calculations, please get in touch with our Employment Law Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.