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Do I have to pay my commission based employees the National Minimum Wage if their commission falls below it?

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In certain lines of work, it is common for employees to be paid on a commission basis as opposed to more traditional means. However, workers who you pay wholly or partly on the basis of sales made or deals completed must still be paid at least the National Minimum Wage (NMW). In this article, our Employment Law team detail what payments do and do not count towards the NMW, when you have to pay the NMW and what to do if your commission only workers are required to be at work for a certain amount of hours.

What counts towards the National Minimum Wage?

The elements of an employee’s pay that can be used to calculate the NMW is known as their NMW pay. This NMW pay is calculated on gross pay (before tax and National Insurance have been deducted). Features such as sales, commission, performance-related pay or other payments based on how well the employee does their job do count towards the NMW pay.

However, some payments do not. You should deduct these from your employees’ total pay before working out whether they are getting the NMW. Payments which don’t count include:

  • loans;
  • advances of wages;
  • pension payments;
  • retirement lump sums;
  • redundancy payments;
  • rewards under staff suggestion schemes;
  • any premium element (anything they are paid on top of their basic pay) you pay for working at special times, for example overtime or on bank holidays or any allowances on top of their basic pay, for instance; working in a particular area (i.e. London Weighting), in dangerous conditions, ‘on call’, or performing special duties over and above their normal ones;
  • tips, gratuities, service charges and cover charges.

When do I have to pay the National Minimum Wage?           

You do not have to pay your workers the NMW for each hour they have worked, but you must pay it, on average, for the time worked in a pay reference period. This is usually the period of time for which a worker's wage is actually calculated. This means that any of your workers who are paid weekly will have a pay reference period of one week and your workers who are paid monthly will have a pay reference period of one month. In relation to the NMW, a pay reference period cannot be longer than one calendar month.

The wages allocated to a pay reference period are the wages your worker will receive during that period i.e. between pay dates, and the wages they have earned in that period but will not receive until the next period. Commission payments are a common example of when pay may be earned in a particular pay reference period, but not paid until the next pay reference period. For example, if you have a worker that earns commission on sales towards the end of March, but it was not possible to calculate the earnings in time to get the money into the March pay packet, the money will still be counted in March (the period they earnt it in) when it comes to calculating whether the NMW has been paid, provided that it is always received in April (the next period). Any pay "transferred" in this way, from the period when it was received to the period when it was earned must stay transferred. This means that any pay counted in the period your worker earned it in should not also be counted in the pay reference period you paid it to them as this would be double counting.

However, if the commission is earned in one pay period but then not paid for two pay reference periods, then it will count in the pay reference period in which it is received.

What if my employees have set working hours?

If you have commission-only workers that are required to be at work for a set number of hours per day or week, their work must be treated as "time work", even though their pay is calculated in accordance with the number of sales or deals they have successfully completed. You must also be sure they receive, on average, at least the NMW for each hour worked in the pay reference period.

This means that if your workers' commission over a pay reference period falls below the NMW (taking into account any transfer of pay explained above) based on the number of hours worked, you must make up the sum to at least the NMW.

Calculating when to pay a commission based worker the National Minimum Wage can be a complex process, but it is vital that you do so to comply with the law and avoid any tribunal claims. If you are unsure if your workers’ pay is falling below the NMW, or would like further advice on this, you can contact a member of our Employment Law team on 023 8071 7717 or email employment@warnergoodman.co.uk.

To receive regular Employment Law updates from the team regarding recent tribunal cases and legislation updates, you can subscribe to our weekly Employment Law Newsletter by completing our subscription form or emailing us at events@warnergoodman.co.uk. 

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ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.