Leave payments: are bonuses and commissions part of ordinary pay?

Leave payments: are bonuses and commissions part of ordinary pay?
By Paul Munro on 15 March 2017 When calculating annual leave and long service leave payments, should we consider an employee's bonus and commissions? 

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Q Our company employs a number of sales representatives whose remuneration comprises their ordinary monthly salary (retainer) and commission on sales. One employee recently took annual leave while another took long service leave, both paid at their ordinary rate of pay.

Both employees have complained to our pay office that they should have received payment representing an average of their commission payments. Because commission payments cannot be predicted, we presumed they are not included in any calculation of ordinary pay for any period of leave.

Are commissions included in ordinary pay for the purposes of annual leave and long service leave? Both workers are employed in New South Wales.

A While the definition of ordinary pay under the Fair Work Act (s12) applies to those conditions provided under the National Employment Standards, such as annual leave, the applicable modern award or enterprise agreement may provide terms which are more beneficial to an employee with respect to ordinary pay.

In the case of long service leave, generally the relevant state or territory long service leave legislation determines the definition of ordinary pay.

Annual leave

Under the National Employment Standards, an employee is to be paid at their ‘base rate of pay’ for a period of annual leave. The Fair Work Act (s16) defines this term to mean an employee’s pay for his/her ordinary working hours but excluding incentive-based payments and bonuses, loadings, monetary allowances, overtime or penalty rates or any other separately identifiable amounts.

As commission could be described as an ‘incentive-based payment’ scheme, no commission is payable for a period of annual leave under the Standard.

Modern award

While the National Employment Standards provide that an employee receives annual leave paid at their base rate of pay, the applicable modern award or enterprise agreement may provide a more beneficial definition of ordinary pay for the purposes of annual leave.

In this case, the Commercial Sales Award 2010 covers sales representatives, where clause 24.3 states that where an employee receives commission, the employee is to receive either the average of the commission payments earned over the preceding 12 months or the 17 ½% leave loading, whichever is the greater.

Most modern awards appear silent on the question of commission or bonus payments with respect to annual leave. This means the definition of ordinary pay under the Fair Work Act, which excludes commission, will apply.

Long Service leave

State and territory long service leave legislation usually refers to commission or bonus or incentive-based schemes when determining an employee’s ordinary rate of pay.

The Long Service Leave Act 1955 [NSW] provides that an employee who is on a fixed time rate of pay and commission is paid at the current weekly rate of pay under the retainer, while an average of the commission is then paid in addition to the retainer.

What this means is commission and bonuses received by the employee are averaged over the previous 12 months, or five years (whichever is the greater) and added to the weekly rate used to calculate the leave payment. However, bonuses paid to an employee who is otherwise paid in excess of $144,000 per annum are not included.

Other jurisdictions

It should be noted that this method of calculating commission and retainer may be different under other long service leave legislation. For example, it is common for an employee’s ordinary pay to be an average of the employee’s weekly wage (such as a retainer and commission) over a specified period.

Reference should be made to the applicable state or territory long service leave legislation to determine the method of calculating an employee’s ordinary pay in regard to payment for a period of long service leave.

Other leave

Those forms of paid leave prescribed under the National Employment Standards generally define ordinary pay to mean an employee’s base rate of pay. This excludes incentive-based payments and bonuses, such as commission. This is the case with respect to personal/carer’s leave, compassionate leave and jury service.

The bottom line: In the case of annual leave, ordinary pay is determined by the Fair Work Act or the applicable modern award or enterprise agreement. The definition of ordinary pay for the purpose of payment for long service leave is usually determined by the relevant state or territory long service leave legislation.
 

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