What should I consider before implementing a commission scheme?

A commission scheme can be a good way to motivate employees, award top performers, and give employees a stake in the company’s success. However, some employers don’t take into account all the potential risks and pitfalls associated with a commission scheme. This article discusses some of the factors employers should consider before implementing a commission scheme.

Holiday Pay

When evaluating the cost of a commission scheme to the business, employers should be aware that commission will need to be paid as part of an employee’s holiday pay.

First, a bit of background: the Working Time Regulations state that workers are entitled to 5.6 weeks’ annual leave. For most workers, four weeks of this leave must be paid at the rate of ‘normal’ remuneration. For the remaining 1.6 weeks workers are only entitled to be paid their ‘basic’ rate of pay. The situation is different for part-year or irregular hours workers who must be paid their entire 5.6 weeks’ holiday at the rate of normal remuneration.

Normal remuneration includes “payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract.” What this means in practice is that where a worker earns commission the employer will need to ensure their holiday pay includes an element of commission in addition to their basic salary. Employers can do this by calculating the average commission earned over the previous 52 weeks before the holiday to be taken (ignoring weeks where no remuneration was paid, such as weeks where the employee was off sick or on family leave) and adding this to the worker’s holiday pay. Holiday pay must be paid this way so that workers are not disincentivised to take their holiday. However, it is an additional expense on employers.

Clawback

Employers may find themselves in the awkward situation of needing to claw back commission payments already paid to an employee. This could be because:

• The customer has cancelled a contract;
• The customer has demanded a refund;
• The employee failed to meet a performance target;
• The commission was paid in error; or
• The employee committed misconduct in securing the sale.

It is helpful to have the circumstances in which you would want to claw back commission explicitly stated in a commission scheme which is signed by the employee. This makes expectations clear and can help avoid disputes in the future. The scheme should also state that any commission which is not repaid may be deducted from future payments or the employee’s wages. If you make such a deduction without the written agreement, the employee may be able to make a tribunal claim for unlawful deduction from wages.

Termination

Employers should also give consideration to how the commission scheme will operate when an employee has given notice of their resignation. Will the employee be entitled to receive commission for sales completed during their notice period? What if the employee secured a sale whereby the customer is paying in instalments and one instalment falls after the date of termination? Will the employee be entitled to receive their commission on this payment?

As above, it is essential that the rules are clearly laid out in a written scheme so that all employees know what to expect and disputes can be avoided.

Other practicalities to consider

• Does commission fall due when the customer has signed a contract, or when they have paid?
• Can employees share commission?
• Will commission be taken into account for Company sick pay or family leave pay?
• How often will you review and update commission rates?  

If you are thinking about implementing a commission scheme for your workforce, get in touch. Our advisors can inform you in more detail of any risks or concerns you need to be aware of. Our document audit team can also help draft a commission scheme that protects you and your business. The Employment Team can be reached by emailing employment@warnergoodman.co.uk or by calling 023 8071 7717.