Find out how to structure problem-free commission arrangements to avoid big trouble down the track.
Drawing up a commission arrangement for the newest member of your broker team can be a finicky process so it’s best to get the basics out of the way first, even if they may seem obvious.
Those basics are the fine print differences between an employee and an independent contractor that you may have forgotten about and is important when it comes to who can enter a commission-only arrangement and who cannot.
If a new broker is to be an employee of the company they cannot be hired on a commission-only basis, says PCC Lawyers Associate Lucienne Gleeson, as it would breach the Fair Work Act and the national minimum wage order which is made each year by the Fair Work Commission under the Act.
However, an independent contractor can be paid on a commission only basis, says Gleeson. “An independent contractor could potentially be paid a fee for any successful brokerage deals made but not paid any fees for any work which does not result in a loan being taken out. Whilst this might be likened to 'commission' it is instead just payment for services provided.”
Gleeson says this is where companies need to be extremely wary that such relationships are not in fact sham contracting arrangements where the person has been given the title of 'independent contractor' but are actually an employee missing out on their minimum wage entitlements.
“Whether sham contracting takes place is an objective test,” says Gleeson
. “Whilst someone might be called an 'independent contractor' they will in fact be considered an employee if the relationship traits are akin to those of an employer/employee.”
Brokers may also be covered by the Banking Finance and Insurance Award 2010, says Gleeson, which sets the minimum weekly salary that must be paid to relevant employees.
So brokers employed by a company can have a commission scheme on top of their minimum base salary, as entitled under the national minimum wage or relevant award classification.
Gleeson warns strict penalties are incurred if companies have entered into a sham contracting arrangement and failed to provide a base wage under a commission agreement to those who really are employees, not independent contractors.
“If companies do not pay at least a base salary that meets the minimum wage they are not only liable for having to back pay the employees but could also be exposed to penalties under the Fair Work Act of $51,000 for companies and $10,200 for directors of companies.
“It is therefore really important that companies take this issue seriously and do not employ people on commission-only basis.”
Tips for structuring employee commission arrangements
To quell disputes which often occur over what the terms of a commission arrangement are, Gleeson says to clearly define a commission structure in writing and to include:
Commission-only structures for independent contractors
- discretionary elements to the structure, such as if the employee's employment is terminated they will not be paid any outstanding commission
- how much commission can be earned and on what basis i.e. percentage of sales, a fixed payment for each sale
- when the commission will be paid to the employee
- signatures of both the company and its employees
Gleeson recommends independent contractor arrangements operate under a written contract rather than on verbal terms alone, for the protection of both parties and to ensure everyone is on the same page.
set out what the services provided are and how much will be paid for certain outcomes.
“Could the person you are considering engaging as an independent contractor in fact be classed as an employee?”
- do not set hours of work but instead focused on the achieving outcome - successfully selling loan products
- must include a termination clause and how much notice must be provided by either party to terminate
- When asked if she has any ‘safety net’ tips for brokers finding themselves at either end of a commission arrangement, Gleeson says try to look at the situation from an objective point of view.
She recommends seeking legal advice on the complicated determination but that the path of less legal risk would be to engage someone as an employee.
Gleeson says it’s better to be “paying them at least the relevant minimum wage plus commission than to be in the sights of the courts and the Australian Tax Office because you have tried to save money by hiring someone as an 'independent contractor' when in fact they may not be that.”
This article originally appeared in Australian Broker issue 12.06.