The Supreme Court has upheld the Court of Appeal’s decision (although for different reasons) in A Labour Inspector of the Ministry of Business, Innovation and Employment v Tourism Holdings Limited which considered s 8(2) of the Holidays Act 2003 (Act). The Supreme Court held that payments may be included in the ordinary weekly pay calculation under s 8(2) of the Act if the payments are made regularly when assessed against a 4-week time period.
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.
Where 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.
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.
Tour bus drivers for Tourism Holdings were entitled to commission. The commission was derived from bookings that they arranged for passengers for side activities with third party operations which were accounted for by the third party operators to the employer. This matter involved consideration of whether these payments were a “regular part” of their pay for the purposes of the 4-week formular for ordinary weekly pay in s 8(2) of the Act.
The Employment Court held that the commission payments earned by drivers under their employment agreements were not a “regular part” of the drivers’ ordinary weekly pay for the purpose of the 4-week formula under s 8(2) of the Act. It considered that “regular” in s 8(2) was intended to mean what is received under the employment agreement for an ordinary working week.
The Employment Court’s decision was appealed to the Court of Appeal, which held that commission payments could only be included in the calculation of ordinary weekly pay if they were a regular part of that pay. It found that “a regular part of the employee’s pay” were payments made:
- substantively regularly, being made systematically and according to rules; or
- temporally regularly, being made uniformly in time and manner.
Accordingly, commission payments were held to be “a regular and habitual part of their pay”.
Further information on these previous rulings can be found in our article: Court of Appeal Overturns Employment Court’s Decision in Tourism Holdings.
The Supreme Court’s Decision
The Court of Appeal’s decision was appealed to the Supreme Court.
The issues on appeal were:
- Whether regularity should be assessed against a standard period of a week or rather against a longer time period (i.e. 4 weeks or per the trip pattern)?
- What weeks should commission be allocated to?
The Supreme Court considered whether s 8(1) or s 8(2) of the Act should be used to determine the drivers’ ordinary weekly pay. It found that “regular part” within s 8(1) refers to payments that enable a sensible assessment of the amount of pay “for an ordinary working week”. Accordingly, the variability of the driver’s working pattern and the unevenness of their pay precluded a sensible assessment of the amount of pay for an ordinary working week. It indicated that unevenness in pay alone may not be sufficient to exclude s 8(1) if a sensible assessment could be made, although the scope for averaging is limited.
The Supreme Court then considered s 8(2). It found that even though a payment may be insufficiently regular to be used in the assessment for “the amount” of pay for an “ordinary working week” under s 8(1), that payment could be sufficiently regular to be included in the calculation of earnings over a 4-week period under s 8(2).
The Supreme Court considered that 4 weekly was the standard to measure regularity against. It provided little guidance about what would constitute regular, and indicated that 3 or 4 payments a year would not be sufficiently regular. It noted that “regular part” was indeterminate and that s 11 of the Act contemplates this by permitting a Labour Inspector to determine ordinary weekly pay.
It found that commission payments made monthly on average by Tourism Holdings were sufficiently “regular” to be included in the final figure calculated through s 8(2) and that it did not matter whether they can also be said to be “regular” against the standard of an ordinary working week.
In terms of the second issue, the Supreme Court held that commissions in these circumstances become payable when “all preconditions to entitlement are satisfied other than debriefing and reconciliation”. Therefore, the periods to which the commissions related to are determined by when the activities were sold and taken, that is when they became payable rather than when the employee was paid the commission.
What this means for Employers
Before calculating ordinary weekly pay, employers must determine whether s 8(1) or s 8(2) of the Act should be used. The formula in s 8(2) should only be used when “it is not possible to determine an employee’s ordinary weekly pay” under s 8(1). This involves consideration of the variability of the employee’s work pattern and the (un)evenness of the employee’s pay. Unevenness of an employee’s pay alone, may not be sufficient if weekly regularity enables a sensible assessment.
If an employer uses the 4-week formula in s 8(2) to calculate ordinary weekly pay, then the employer will need to consider which payments are a “regular part of the employee’s pay”. They will be regular if they are made regularly when assessed against the standard 4-week period immediately preceding the holidays taken.
However, the Supreme Court’s analysis in regard to the second issue may lead to practical difficulties for an employer in particular circumstances. This is because it attributes the payment to the period that the employee qualified for the payment, rather than when the work was done or when the amount was paid. For most employers, if an employee takes holidays after a payment (e.g. a commission) has become payable but before it is paid, it will be impractical to include such payments in the s 8(2) formula because they will not yet exist in the payroll system.
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.