Some industries and roles may offer commission to employees on top of a wage or salary to encourage performance. If intending to engage an individual on a commission-only basis, employers should be aware that employees must still be paid the minimum wage.
Commission is a form of pay given to an employee after they complete a task or reach a target. Generally used as an incentive in sales-based roles, commission can be offered in a variety of situations. Commission payments are typically calculated based on a percentage of the sale or transaction value.
Commission pay can be highly motivating for those in sales and marketing, particularly salespeople. Giving employees an incentive to perform better can greatly increase sales and productivity for the business. Commission payments also mean employers do not have to pay under-performing staff the same as their more productive counterparts.
Commonly, employees are offered commission on top of a base salary, and the percentage of the sale or transaction value is small. However, it is possible to engage employees on a commission only basis, where the commission per sale or target is usually much higher. When engaging employees in this way, there are a number of considerations employers should be aware of, such as minimum wage obligations and compliance to zero-hour contract legislation.
In cases where employees are paid commission only and will not receive an hourly wage or annual salary, they must still be paid at least the minimum wage. This means an employer cannot underpay an employee for the hours they worked, even if they have not met the sales goals or targets.
At the other end of the spectrum, commission can be capped at a certain amount, allowing employers to have control over the maximum amount they will pay. This should be agreed between employer and employee in a registered agreement.
An amendment to the Employment Relations Act in 2016 was introduced to remove zero-hour contracts. Where commission based employees were previously engaged on zero hour contracts, employers must now ensure they comply with the new legislation. As it relates to commission based work, the amendment outlines that:
This means that while it is legal to employ individuals on a commission only basis, employers must not request that staff are available for specific periods of time, unless there is financial compensation for this time. For example, if an employer requests that a commission-only salesperson is on standby all day, but only attends a short period of actual work, the employer must ensure that the employee receives at least the minimum wage for the whole day’s work, regardless of whether the employee earns commission that day.
The rules of commission payment can be negotiated between employer and employee. These guidelines must be set out in a registered agreement and signed by the employee.
The employee must understand the rules of this agreement including the definition of commission, how the commission pay is calculated, what the pay rate per commission is, and if they receive an hourly wage or salary, as well as when commission payments will be made.
For assistance on managing commission-based employees, call Employsure on 0800 675 700.