New Zealand Law Society - Test case clarifies law on leave payments for employees paid on commission

Test case clarifies law on leave payments for employees paid on commission

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Tauranga-based company GD (Tauranga) Ltd has been successful in the Employment Court, with the judgment in their test case GD (Tauranga) Ltd v Price & Others [2019] NZEmpC 101 confirming the legality of their decision to switch to paying their employees their “relevant daily pay” under the Holidays Act 2003 when they take sick leave, bereavement leave or public holidays (“other leave”). The judgment has clarified the law on what method of calculation an employer may use for employees who are paid a base salary plus commissions when they take other leave under the Act and may have wide-reaching implications for employees across the country who are paid in the same manner.

A dispute arose in 2016 between the employer and its sales representatives who sell house and land packages when it switched from paying their “average daily pay” (ADP) calculated under s 9A of the Act for other leave taken to paying their “relevant daily pay” (RDP) under s 9. The employees earn large commissions from time to time when house sales are settled, and are also paid a base salary that is equivalent to the minimum wage.

The employer had previously paid the employees for other leave using the ADP calculation, sometimes resulting in the employees receiving payments in excess of $1,200 for a single day of leave. By contrast, after the employer switched to using the RDP method in 2016 following advice that it was legally able to use either method, such payments were reduced to approximately $120-$130 per day.

The employees disputed the employer’s ability to switch calculation methods, and four separate legal opinions obtained by either side to the dispute provided conflicting interpretations of the law. The law in this area regarding the appropriate use of either the RDP or ADP calculation had become unsettled since the introduction of the ADP definition in 2011, with previous decisions in the courts and the ERA providing differing interpretations.

The employer, represented by Cooney Lees Morgan, was granted leave to have the application heard as a test case in the Employment Court, on the basis that this was an important question of law that could have wide-reaching implications for employees across the country who are paid by base salary and commissions. The court acknowledged that its decision “may have wider ramifications in the workforce” and noted that the question was recently touched on by the Holidays Act Taskforce, who noted that s 9A was not “explicit” about what was required when an employer can determine both RDP and ADP.

The court’s decision

The case was heard by a full three judge court, and confirmed the employer’s view that where an employee’s daily pay varies during their usual pay period (as is usually the case for employees who earn commissions) but the employer is still able to calculate their RDP, the employer has a discretion as to whether it uses an employee’s RDP to calculate their pay for other leave, or whether it uses an employee’s ADP.

The court further confirmed that the discretion is ongoing, and is not somehow abandoned or eliminated by an employer’s choice to use one particular method on any given occasion:

“[35] 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.”

The confirmation of an employer’s discretion to pay either RDP or ADP for other leave taken under the Act where these circumstances apply will come as a welcome relief to many employers across the country who have grappled with the correct way to pay their employees. The decision is already receiving attention from employment law experts and the ongoing implications for employers and employees will continue to unfold over the coming months.

Peter Crombie is a partner, and Tania Waikato an associate at Cooney Lees Morgan. They represented the firm in the case.

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