How should commission payments be factored into the calculation of holiday pay? This is the question that the Court of Appeal recently considered, exploring the Holidays Act’s definition of ‘ordinary weekly pay’ in a mostly untested area of the Act.
Under the Act, holiday pay is determined based on the higher of two calculations: an employee’s ‘ordinary weekly pay’ or ‘average weekly earnings’. Ordinary weekly pay includes productivity or incentive-based payments (such as commission) which are a ‘regular part of the employee’s pay’. Previous court decisions have confirmed that regular commission payments should be included in these calculations, but this case is the first to determine how this should work when the employees don’t work an ordinary working week and the commission payments are paid at irregular times.
Tourism Holdings operates guided bus tours and employs driver guides, who earned commission on the sale of activities they booked for passengers. These commission payments were not earned weekly, but at irregular intervals measured by the length of each trip and subsequent reconciliation with documents from the activity provider. The company argued that the commission payments were not a regular part of the drivers’ pay, and so should not be included in the calculation of ‘ordinary weekly pay’. The Labour Inspector argued that the commission payments were a regular part of the drivers’ pay, and so should be included in the calculation, which would result in a larger sum of holiday pay owing.
The Court of Appeal ultimately agreed with the Labour Inspector and overturned the Employment Court’s decision (which had found in favour of the company). The purpose of this part of the Act, the Court stated, was to allow a calculation representative of an ordinary working week, where there is no ordinary working week. The Act therefore deliberately does not require a payment to be earned ‘weekly’ to be considered a ‘regular part of the employee’s pay’.
The Court ruled that the payments were sufficiently “regular and habitual” for the purposes of the Act. They formed part of the driver guides’ pay in the week after the tour concluded (when bookings made by the drivers were processed and reconciled), regardless of the length and irregularity of the tours.
The Court essentially found a regularity fitting the pattern of the tours which a driver guide was responsible for over time. The correct approach, therefore, was to include those commission payments in the calculation of holiday pay. The company now potentially faces a significant backpay issue, which can be claimed by employees going back for a maximum of 6 years.
As diverse working arrangements and remuneration packages have become increasingly common, the ‘40 hours per week, 9am-5pm’ centric provisions of the Act (such as ‘regular part of the employee’s pay’) have become more difficult for employers to implement. Employers utilising pay structures with performance-based payments, and particularly those with employees whose hours do not easily fit into an ‘ordinary working week’, should re-examine their holiday pay arrangements and ensure that they are meeting the obligations of the Act.
For more information, or specialist advice on holiday pay, please contact a member of our employment team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.