Commission: What is it and how does it work?
August 30, 2016
Many businesses have some form of incentive or bonus scheme for the purposes of motivating their employees or retaining their loyalty. Commission payments are one such type of bonus – they fluctuate based on an employee’s sales or the value they earn for the business, and are often calculated based upon a fee, percentage or rate of the employee’s success.
While there is nothing wrong with the basic concept of paying for “results” rather than time, employers must be careful that they are not breaching their employment obligations by choosing to implement a commission structure.
Commission as an extra incentive
Many industries, such as retail, utilise a system whereby employees are paid an hourly wage or annual salary but also have the ability to earn greater amounts through a commission scheme which pays a percentage of the employees’ sales.
In this scenario, the commission payment is additional to their wages such that if an employee was unable to make the required sales and was therefore eligible for little to no commission in a particular period, the employer would not be liable for an underpayment.
This type of commission is merely used as an incentive to keep employees working hard and striving to reach their goals.
Any business can implement a scheme which offers commission payments as an extra incentive, as this is “above and beyond” your minimum obligations. However, we recommend that you carefully consider how you will introduce it, such as whether you include it in individual contracts or company-wide policies, and how much discretion you will have to change or remove the scheme at any time.
Commission as an employee’s “wage”
In certain situations, commission payments can form the entire compensation for an employee’s work. However, this must be permitted by the applicable modern award or enterprise agreement.
For example, the Real Estate Industry Award 2010 allows for “commission-only employees” upon the satisfaction of particular requirements, including that the employee:
- has entered into a written agreement with the employer that sets out how the commission will be calculated
- has a real estate agent’s licence or is permitted to perform the duties of a real estate salesperson under law
- is engaged as a real estate salesperson or was an active licensed real estate agent for at least 12 months in the last five years
- is at least 21 years of age
- is not engaged as a casual, a junior, a property sales associate or a trainee
- has reached the minimum income threshold or has operated their own real estate business within the last five years
As can be seen, the rules surrounding commission-only employees are fairly stringent, and there are relatively few modern awards which permit it at all.
In regards to award and agreement-free employees, they can be paid commission on the condition that they still receive at least the national minimum wage. This doesn’t provide much benefit to employers as effectively it becomes a “rose by any other name” scenario – if you’re paying commission that is at least equal to an hourly wage, then you might as well be simply paying the hourly wage itself.
Making the right decisions
If you are considering implementing either a commission incentive scheme, or are wondering whether you are permitted under the applicable award or agreement to put in place commission-only payments, we recommend you seek assistance from a qualified professional. The risks of getting it wrong range from underpayment claims leading to fines and reputational damage, to being locked into inescapable obligations to pay bonuses despite illogical results.
For more information on commission and what it means for you, clients should contact the HR Assured team. If you’d like more information about the benefits of becoming an HR Assured client contact us today for an informal chat.