Are​ commissions included in termination pay?


Are​ commissions included in termination pay?

Should commission payments be considered when calculating a sales rep's termination pay?

Should commission payments be considered when calculating a sales rep's termination pay?

This question was recently sent to our Ask an Expert service.

Commission payments for employees in sales-related positions are a potential source of dispute with respect to entitlements under the Fair Work Act. For example, when an employee is made redundant are the commission payments paid during the course of the employee’s included in redundancy pay on termination of employment?

Q We recently terminated a sales representative who had been employed for about eight years. She was was paid a base salary, plus commission on sales. Commissions added about 20 per cent to her base annual salary. The commission was paid monthly during the financial year. The employee was paid all entitlements on termination calculated on her base salary.

She claims her termination entitlements should have included an average of her commissions earned over the previous 12 months. The components of termination pay include payment in lieu of notice, pro rata annual leave and redundancy pay. Should entitlements payable on termination under the National Employment Standards include commissions paid under the employee’s contract of employment?

A The employer needs to consider a number of statutory and contractual obligations in this circumstance, including the Fair Work Act, long service leave legislation, and the applicable modern award. The terms of the employee’s contract of employment may also be relevant.

Payment in lieu of notice

The Fair Work Act (s117) requires an employer to provide the relevant period of notice of termination to an employee or the payment of the equivalent in lieu of notice. The amount in lieu is to be paid to the employee at the full rate of pay for the hours the employee would have worked had the employment continued until the end of the minimum period of notice.

'Full rate of pay' is defined in the Fair Work Act (s18) to include the following: incentive-based payments and bonuses; loadings; monetary allowances; overtime or penalty rates; any other separately identifiable amounts.

The Fair Work Act, however, provides a different definition for ordinary pay with respect to annual leave and redundancy pay.

Annual leave and redundancy pay

Annual leave on termination and redundancy pay under the National Employment Standard are payable at an employee’s base rate of pay. The Fair Work Act (s12) defines ‘base rate of pay’ to mean an employee’s ordinary weekly rate of pay for their ordinary hours of work, excluding incentive-based payments and bonuses, loadings, monetary allowances, overtime or penalty rates, and any other separately identifiable amounts.

Long service leave

In the case of pro rata payment of long service leave on termination, ordinary pay is usually defined by the relevant state or territory long service leave legislation.

Generally, an average of any bonus or commission payments would be included in an employee’s ordinary pay, although this may depend on the regularity of payment. The average is normally calculated over the previous 12 months, although it can be more than five years in some jurisdictions. For example, a bonus paid annually may not be regarded as ordinary pay under some statutes. Reference should therefore be made to the relevant long service leave legislation to determine whether commission is included in the employee’s ordinary rate of pay regarding pro rata long service leave on termination.

The Commercial Sales Award 2010 defines ‘commission’ to mean ‘any financial incentive payment, financial bonus... but will not include any bonus made by the employer on the basis of profitability or performance of the employee…’, the terms and conditions of which are to be set out in writing by the parties. Clause 10.1 requires the employer to provide a written statement to the employee containing certain information, including 'the conditions and terms on which commission is payable or not payable'. This may include terms which refer to post-employment payment of commissions earned during the course of the employee’s employment.

The bottom line: Whether commission is included in an employee’s termination pay depends on the nature of the payment, the relevant entitlement and the terms of the employee’s contract of employment.

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