News & Thinking
Employees earning commission: Relevant Daily Pay or Average Daily Pay?
This is a technical update for those interested in all things Holidays Act 2003. It is important for those who pay employees based on commission.
A recent Employment Court decision has finally clarified a point of law on the payment of public holidays, alternative holidays, sick leave, bereavement leave and family violence leave. In this case these types of leave were described as “other leave”.
In mid-August, a Tauranga based building company was successful in arguing that their employees who are paid on commission, should be paid according to their relevant daily pay (RDP) as opposed to their average daily pay (ADP) for their “other leave”.
The employees of the company were sales consultants selling houses and land packages. They were paid a base salary equivalent to the minimum wage and they earned commission based on the sales they made. This meant that their earnings fluctuated. The decision to pay employees at the RDP rate was challenged as being unlawful on the grounds that RDP is not payable if an employee’s earnings fluctuate.
The legislation says that an employer may use an employee’s average daily pay for the purposes of calculating payment for a public holiday, an alternative holiday, sick leave, bereavement leave, or family violence leave if—
(a) it is not possible or practicable to determine an employee’s relevant daily pay under section 9(1); or
(b) the employee’s daily pay varies within the pay period when the holiday or leave falls.
The company applied to the Employment Relations Authority for a ruling on the matter and the matter got removed to the Employment Court, on the grounds that there was a significant point of law to be decided which could have ramifications on the wider workforce.
The Employment Court agreed with the company and held that despite the fluctuations, it was possible and practicable to calculate RDP because the commission amounts and when they were payable was very clear under the terms of the commission scheme.
The Court held that when it is possible for the employer to calculate RDP, even if the employees’ daily pay varies within the pay period, the employer has a discretion as to whether it applies RDP or ADP. Therefore the company was entitled to pay at the RDP rate.
This case has provided clarification on a long standing technical query.