Our Answer – whilst in some situations engaging employees on a commission-only basis can be achieved practically, the main issue is that the employee can never receive less than their legislated minimum entitlements, including entitlements to minimum hourly rates.
Commission-only employee gets $28,000 in backpay
For example, the Fair Work Ombudsman issued a press release regarding a ‘commission-only’ trainee investment advisor who was able to recover an underpayment amounting to a total of $28,000 over a period of only 7 months of employment. This was because the employee was entitled to receive a minimum hourly payment under the applicable award of at least $22.86 per hour, but often received less than that, including – at times – no payment at all.
Minimum Payment Obligations
Whilst the above FWO press release didn’t provide much detail, the employee was covered by an award, the Banking, Finance and Insurance Award, which provides for minimum weekly wages for full-time employees. Part-time and casual employees are also entitled to pro rata amounts based on their weekly hours.
The Award also provides for employees to receive annual salaries (there are some requirements including the employee being advised in writing beforehand) in lieu of minimum monetary entitlements under the award, but subject to them not being disadvantaged over the year compared to what they would have received under the award, including overtime payments, allowances and annual leave loading.
If an employee was to work outside of standard hours, such as nights and weekends, the employee may have been entitled to shift penalties or overtime payments, which also need to be considered within their minimum salary.
Is there a work around?
Often ‘commission-only’ employees receive incomes significantly higher than what they would have received under minimum award conditions. As long as the minimum requirements of any applicable award are complied with, then it is legally achievable for an annual salary arrangement based on commission payments to be put in place.
Care should be taken even with employees who are technically not covered by an award (and often employers can be mistaken even as to this – see more below), as they cannot receive less than the federal minimum wage on an hourly basis.
ER Strategies recommends the inclusion of the following to make sure the arrangement is going to comply with minimum entitlement requirements –
1. Include an offset clause in the employment contract – our draft employment contracts (provided to our clients as part of our retainer option services), include this option for those contracts where provisions such as incentives and / or commissions might be desired by an employer. These sorts of clauses help ensure any additional payments applicable under a contract can be offset against any award financial obligations.
2. Continuously check the salary received is sufficient – whilst this might be a time-consuming process where an employee’s regular guaranteed wage is not significantly above their award rate or minimum wage entitlement, this can less of an issue where the employee in practice regularly receives payments significantly above their award rate. Care should be taken to check that there are not provisions preventing commission-only arrangements under the applicable award (or enterprise agreement), or which might otherwise interfere with the operation of a commission payment scheme.
For example, the ‘payment of wages’ clause of an award (other than the above-mentioned BFI Award) might require that any salary received must meet the minimum wage entitlement for each pay period (weekly, fortnightly, 4-weeekly or sometimes monthly), meaning extra payments in one period can’t be offset against under payments in a different pay period, such as the period before or after.
Another often forgotten award entitlement that should be considered in these calculations is any annual leave loading payable in a pay period. Under most awards, the loading is 17.5%, meaning an employee might be underpaid in a pay period where their total commission payments plus other minimum payments are less than that amount.
Note – ER Strategies has developed some salary calculators under some awards to help determine minimum salary entitlements under some modern awards.
3. Provide for ‘top-up’ payments where required – where an employee may have had an award (or minimum wage) entitlement above what they actually received in a pay period, it is important to have in place a mechanism to ‘top them up’ so they do receive at least their minimum required payment.
4. Keep Adequate Pay Records – If you intend employing an employee under a ‘commission-only’ arrangement where the employee is not necessarily guaranteed to receive at least the minimum award rates which would have been payable within the relevant pay period, then the employer will need to keep detailed records to show the actual hours worked by the employee so that the minimum award wages can be calculated if required to prove that the commission payments made have been adequate compensation.
5. Don’t assume an award doesn’t apply – a very common but equally erroneous assumption is that all managers and many professional employees (such as Accountants) are ‘award free’, or that an employment contract or annual salary arrangement can completely displace the award provisions.
There are some awards which plainly do cover some managerial classifications and certain levels of professional employees. Given there are around 122 different modern awards that can apply across the vast majority of Australian businesses and employers, it is always best for clients to call specialists such as ER Strategies to check whether an award does or can apply to a particular managerial or other classification.
Whilst a degree of financial flexibility can be achieved by engaging employees on salaried arrangements, care should be taken with drafting to avoid unpleasant surprises down the track, requiring expensive and time-consuming calculations where an employee didn’t receive their lawful minimum entitlements.
6. Occupational Superannuation – employers also need to bear in mind that SGC superannuation contributions are calculated on “ordinary time earnings”, which will generally include performance related payments (except a bonus in respect of overtime hours only). This link will take you to an ATO website checklist to help employers identify what payments are considered to be part of ordinary time earnings.
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ER Strategies already has created a number of tools and templates to help client employers remain ‘Employment Compliant’ and to avoid unwanted media attention, or having to make back-payments to underpaid employees.