In a case involving tourism operator Tourism Holdings, the Supreme Court has determined that payments are a “regular part of the employee’s pay” if they are of a kind made regularly when assessed against the previous four-week period before an annual holiday is taken.
The latest decision is consistent with case law before the Court of Appeal’s judgment, which had significantly broadened the scope of what might be described as a “regular” payment.
Under the Holidays Act, annual holidays must be paid at a rate based on the greater of the employee’s average weekly earnings or ordinary weekly pay.2 “Ordinary weekly pay” means the amount of pay that the employee receives under their employment agreement for an ordinary working week.3 However, where it is not possible to determine the “amount of pay that the employee receives under their employment agreement for an ordinary working week”, payment is based on the employee’s gross pay for the previous four weeks, less the value of certain payments earned during that period (including productivity or incentive-based payments that are not a “regular part of the employee’s pay”). The total is divided by four to calculate a weekly amount commonly known as OWP2.4
In this case, Tourism Holdings operated bus tours over various routes and varying duration. The bus drivers’ work pattern was dictated by the length of tours rather than a calendar week. As it was not possible to determine the amount of pay drivers received under their employment agreement for an ordinary working week, OWP2 was used when calculating bus drivers’ annual holiday pay.
The bus drivers were paid a daily rate of pay during a trip and had the ability to earn commission on the sale of activities they booked for passengers. Bus drivers only received commission after the passenger had completed an activity and the driver had completed the required commission documentation.
The employee in this case had been paid commissions in 26 of the 28 months she had been employed by Tourism Holdings. However, Tourism Holdings did not include commissions in OWP2, as it considered that such payments were not a “regular part of the employee’s pay” because they were not regularly paid on a weekly basis.
The main issue was whether the regularity of the commission payment should be assessed against a period of an ordinary week (as argued by Tourism Holdings) or whether it should be assessed against a longer time period (as argued by the Labour Inspector).
The Employment Court agreed with Tourism Holdings that the regularity of a payment should be assessed against a period of an ordinary week. In other words, the Employment Court held that the commission payments should not be included in the OWP2 calculation because they were not a regular part of the drivers’ pay for an “ordinary working week”.
The Court of Appeal overturned the Employment Court’s decision and held that payments are a “regular part of the employee’s pay” if they are made:
(a) substantively regularly, being made systematically and according to rules; or
(b) temporally regularly, being made uniformly in time and manner.
The Court of Appeal’s decision significantly broadened the scope of what may be described as a “regular” payment and was inconsistent with previous case law on this matter.
Without any limitation based on when a payment was made to an employee, the substantively regular threshold adopted by the Court of Appeal had the potential to include many payment types, merely because they arise from a set of rules or criteria. For example, an annual bonus based on a set of rules could have fallen within the “substantively regular” threshold.
Supreme Court’s decision
The Supreme Court held that payments are a “regular part of the employee’s pay” if they are of a kind made regularly when assessed against the standard of a four-week period.
Tourism Holdings argued that whether payments are a “regular part of the employee’s pay” should focus on the amount of pay “for an ordinary working week”. In response to this argument, the Supreme Court held (among other things):
…Payments that are insufficiently regular to be material to an assessment of “the amount” of pay for an “ordinary working week” may nonetheless be sufficiently regular to be included in a calculation of earnings over a four-week period. In this context, “regular part” is most sensibly construed in relation to the time period under consideration – that is, a four-week standard.
The Supreme Court also noted that its interpretation of what payments are a “regular part of the employee’s pay” is consistent with the legislative purpose of the Holidays Act, which is to “put an employee who takes a holiday in broadly the same position as if they had been working.”
The Supreme Court held that substantive regularity is not sufficient to amount to a “regular part of the employee’s pay” for the purpose of the Holidays Act and noted:
To treat say the “substantive regularity” of an annual performance bonus paid just before a holiday is taken as coming into holiday pay calculated under s 8(2) (i.e., OWP2) would be inconsistent with the scheme of the provisions. We would be surprised if the Court of Appeal thought differently.
The Supreme Court considered that the Court of Appeal’s reference to “or” when describing regular payments as being substantively regular or temporally regular was a “slip” and it should have, in fact, read “and”.
The Supreme Court noted that:
an obvious aim of the legislative scheme is the avoidance of artificial inflation of holiday pay entitlements that might result from the inclusion in the first two comparator periods of atypical remuneration payments, say for instance an annual bonus paid just before a holiday is taken.
Accordingly, the Supreme Court held that the commission payments made monthly (on average) were sufficiently “regular” to be included in the OWP2 calculation.
What does this decision mean for employers?
Based on the Supreme Court’s decision, if productivity or incentive-based payments are made regularly when assessed against the standard of a four week period, they must be included in OWP2 payments. This decision is consistent with previous case law on this issue and rules out the possibility of “substantively regular” payments made on an annual basis (such as an annual bonus) from being included in this calculation. This will come as a relief to employers.
Ultimately, whether or not a particular payment should be included in OWP2 will turn on whether such payment is a regular part of the employee’s pay. Determining what is “regular” in this context is fact-specific and should be informed by the frequency of the payments being made to employees in practice.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
1 Tourism Holdings Limited v A Labour Inspector of the Ministry of Business, Innovation and Employment  NZSC 157
2 Section 21 Holidays Act.
3 Section 8(1)(a) Holidays Act.
4 Section 8(2) Holidays Act.