The Status of Commission Payments in the Furlough Scheme
Author – Mark Alaszewski
Key Contact – Claire Knowles
Since its announcement on 19th March 2020 the Coronavirus Job Retention Scheme (otherwise known as the ‘Furlough’ scheme) has given rise to a number of difficult issues in employment law, many of which remain unresolved.
One of these issues relates to the treatment of ‘Commission’ under the scheme. Commission is a general term for additional renumeration which is paid to employees based upon sales targets. Typically, an estate agent or car salesman will receive Commission payments based upon the property or car sales they complete in a calendar month. In Commission based industries it is common for staff to receive low basic pay but a high level of Commission to incentivise employee performance.
When the Furlough scheme rules were first made available on 25th March 2020, the government website stated that ‘fees, commission and bonus’ were not recoverable for employees placed upon Furlough leave. This formula was harsh for employees within Commission based industries as it meant that they would be receiving 80% of their basic pay but in many cases only 25%-50% of their normal pay due to the fact that they were being hit twice by the salary reduction and by the withdrawal of their commission. This approach at least had the benefit of simplicity and clarity as employers and employees understood exactly where they stood and could agree to participate in the scheme based upon this guidance.
This was then superseded by a further announcement on 3rd April 2020 when the government updated its website to state that ‘you (employers) can claim for any regular payments you are obliged to pay your employees. This includes wages, past overtime, fees and compulsory commission payments.’
At the time this seemed to be a welcome clarification that the definition of what was recoverable was being widened and would include any commission which was contractual in nature. A number of employers then proceeded to make Furlough payments to employees based upon the ‘variable pay’ calculation for Furloughed workers (which is either an average of pay over a 12 month reference period or their pay in the equivalent month of the previous year).
Unfortunately, the recoverability of these monies has now been cast into doubt by the publication of a set of rules from the Treasury department on 15th April 2020 which it is assumed will be incorporated into the published scheme rules. The Treasury rules do not refer to commission directly but do state that qualifying costs are restricted to ‘regular salary or wages’. They then go onto state that ‘regular’ means salary or wages which are ‘not conditional upon any matter’ with relevant matters including ‘the performance by the employee of any duties of the employment’.
At first reading this criteria would appear to exclude commission which by its nature is ‘conditional’ upon something happening through the performance of the employee, i.e., a certain number of sales being achieved. However, this is currently contradicted by the guidance on the government website which continues to state that ‘compulsory commission payments’ are recoverable.
So what are employers to do? There appear to be at least three options:
The first is to continue to treat commission as part of ‘regular salary or wages’ and to present the Furlough claim to HMRC on that basis. There is clearly now a risk that HMRC will seek to withhold payment based upon the new Treasury rules in which case employers will need to argue the point with the taxman. This is a significant issue involving many thousands of employees and it may be that HMRC can be persuaded to apply a liberal interpretation of the rules.
The second is to withhold all commission payments from staff, perhaps with a promise to pay back retrospectively if these payments turn out to be recoverable. This involves less immediate risk to businesses who could avoid payment commitments which may ultimately not be recoverable. However it would cause considerable hardship to staff who are losing more than half of their income and may even give rise to challenges for unlawful deductions from wages on the basis that the commission payments form part of the employee’s normal pay or were included in the original Furlough agreement.
A third option is to attempt a more nuanced approach and to pay employees for all commission earnt before they commenced Furlough leave but to withhold payments based upon average historic commission earnings. This approach may be more consistent with government guidance but will also cause hardship to staff who will have no opportunity to earn fresh commission whilst they are on Furlough leave.
Whichever option employers opt for the lack of consistency around this and other issues highlights the chaotic and disorganised implementation of the Furlough scheme. To navigate your way around this and other employment issues please contact the employment team at Acuity who remain contactable during the COVID-19 period.
Claire Knowles – Partner
Mark Alaszewski – Associate
Rebecca Mahon – Solicitor
Adam McGlynn – Trainee Solicitor