Results Based Commission to be Included in Holiday Pay

The Employment Appeal Decision in British Gas Trading v Lock means that results based commission must be paid during holiday periods.   You can read more about the implications of the court decision in this link to an earlier article. {Editor’s note – new link to be added].

Employers now need to consider whether the terms of their commission schemes provide appropriate protection for the company and the employee to avoid inflated costs and also diluting the motivational effect of the scheme.

Your review should consider the following aspects:

  • The motivational effect of the commission scheme on eligible staff;
  • Whether holiday periods, attendance at training events and similar should result in commission payments;
  • Whether the terms of your commission scheme allow for smoothing out of payments and, if so, the motivational effect;
  • Whether the terms of the scheme are sufficiently robust to prevent unexpected costs or results;
  • Have commission payments increased without a corresponding increase in sales.

Pro-Active Review or Wait and See

The decision by the EAT may be appealed by British Gas Trading.  If so, it will be many months before it is known whether payments have to be made during holidays.  In the author’s experience, commission and incentive schemes often contain surprising weaknesses in the conditions that either lead to inflated costs or resentment by individuals about the operation of the scheme.   Irrespective of whether an appeal proceeds, a review will enable you to revise the scheme to ensure it is more effective in the future in the light of any appeal decision.

The Motivational Impact of the Scheme

Before making any changes be clear about the actual motivational effect of the scheme.  Individuals differ but ask your senior managers, on the whole:

  • Are the staff motivated by the ‘buzz’ of a completed sale and the respective payment?
  • Does their motivation decrease when commission earnings are low or when no commission is paid in absence periods including holidays?
  • Does your scheme already cater for commission earnings during annual leave periods?
  • What would be the effect of smoothing out commission payments over a longer period to include holiday periods?   For example, would that lessen their appetite to complete the next sale or would they be more motivated as seeing the organisation is trying to balance both the company’s and their needs?

The nature of your industry and the timescales involved between agreeing a sale and validation of a sale can be protracted which also has an effect on the motivational effect.

If the scheme is no longer a strong motivator, then you should consider changing to a different means of rewarding the affected staff.

Contractual or Discretionary Scheme

It pays to read the terms and principles of your current schemes to check whether the company has entered into contractual terms for the scheme or whether those are truly discretionary.  Many schemes have an element of discretion but the overall scheme has become contractual over time due to custom and practice in the way the scheme has been implemented..

Even if you have included discretionary elements, such discretion has to be exercised reasonably.  In attempts to provide as much flexibility as practicable, the clauses in schemes can become more restrictive than intended by senior managers.

Do the Principles and Wording of the Scheme Match?

Your review should also seek to identify:

  • Whether the terms contain flaws or are the cause of misunderstandings;
  • How the principles will operate in common situations such as holidays, required participation in training events or projects, absence due to accidents at work;
  • If the terms provide an appropriate balance in the light of how the company operates now;
  • Whether more flexibility is desirable in recognised common situations.
  • In what circumstances, will payments not be made despite completed sales;
  • Dealing with the knotty issue below.

What Amount to Pay

With regard to holidays, the EAT has stated that commission is only payable for the first 4 weeks (i.e. 20 days of holiday).  That is because the European Working Time Directive only recognises 20 days.  In the UK, the minimum statutory holiday entitlement is 5.6 weeks (i.e. 28 days total) but an employer does not have to pay commission for holidays over 20 days.  An employer is free to contract to do so which may be more motivating and/or easier to administer.

In practice the amount of commission payable in any period may vary considerably as it will often be linked in some way to the size and/or profitability of the sale.  This will give rise to anomalies in payments in some holiday periods.  Currently, the legal answer is that an employer should calculate the average commission payment of the 12 weeks preceding the start of the holiday.  If in that period any weeks were not worked, then the period should be extended backwards until 12 weeks of work can be included in the calculations.

For some companies that will not produce a satisfactory result.  It is not clear whether any appeal will address the issue of the calculation method.  Several years ago, the Court of Appeal did take note of the calculation method for shift workers who were paid different amounts according to the shift pattern worked.  In that case, the Court of Appeal upheld that the use of a discounted figure was appropriate to smooth out the effect of different shift earnings.  For now though, there is not a tidy answer to the payment of commission.

Reward Schemes Decay Over Time

A review as above will give you a good idea as to the effectiveness of your current commission schemes.  Do not be surprised if you discover that middle managers have employed the payment of allowances or other devices to motivate/steer staff.   The reality is that both experience and research indicate that incentive and commission schemes, in particular, decay in their effectiveness over time.

The author can be contacted if you would like to discuss help to implement a review and/or examine the options as a result of your review.   Please use the Contact the Authors page which can be found in the main menu at the top of the page.

© HR Management Dimensions Ltd. 2008 – 2016.

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