Commission Pay Laws UK: Employer Guide

Commission pay is widely used across sales-led and performance-driven roles to motivate employees, drive revenue and align behaviour with commercial priorities. In many sectors, commission forms a substantial part of total earnings, which increases both its strategic value and the legal risks associated with unclear or inconsistently applied schemes. Although there is no standalone statute regulating commission, employers must comply with a combination of contractual principles, the Employment Rights Act 1996, the Working Time Regulations 1998, case law on holiday pay and unlawful deductions, and equality legislation. Once commission is earned according to the scheme’s rules, it becomes wages under the ERA 1996 and must be paid. Employers must also ensure itemised payslips accurately show commission payments.

Commission schemes frequently generate disputes where trigger events are unclear, deductions are not contractually authorised, or holiday pay calculations fail to reflect commission as part of normal remuneration. Poorly drafted rules, inconsistent administrative practices and misplaced reliance on discretionary wording expose employers to avoidable claims. HR teams therefore need a clear, legally compliant framework for designing, reviewing and applying commission arrangements.

What this article is about
This article provides a detailed employer and HR guide to UK commission pay laws. It explains the contractual and statutory foundations of commission schemes, how commission becomes earned income protected under wages legislation, how holiday pay must incorporate commission, and how commission interacts with sick pay, maternity pay and family leave. It also examines lawful deductions, clawbacks, termination-related rights, the “effective cause” principle, and the steps employers should take to avoid disputes, including transparent drafting, consistent decision-making and compliance with the Braganza duty of rationality in discretionary schemes.

Section A: Legal Framework for Commission Pay

Commission arrangements sit at the intersection of contract law and statutory employment protections. There is no standalone statute that governs commission specifically. Instead, employers must comply with the Employment Rights Act 1996, the Working Time Regulations 1998, equality legislation, and case law on unlawful deductions and holiday pay. Because commission often represents a significant part of an employee’s income, the contractual and statutory rules governing entitlement, accrual and payment must be precise. Once commission is earned under the scheme’s trigger conditions, it becomes wages protected under the ERA 1996 and cannot be withheld unless statute or contract clearly authorises the deduction.

This section examines the legal frameworks governing commission pay, explaining how employers should structure, administer and communicate schemes to avoid breaching statutory obligations or creating unintended contractual rights.

1. Contract law and commission arrangements

Commission arrangements are fundamentally contractual. An employee’s right to commission arises either from express terms, implied terms through custom and practice, or representations made during recruitment that form part of the contractual agreement. The ERA 1996 also requires that the written statement of particulars set out the scale or rate of remuneration and the intervals of payment, which includes commission where relevant.

Express terms
Most commission schemes are formally documented in employment contracts or separate incentive plans. To be effective, express terms must specify:

• the basis and formula for calculation
• the qualifying criteria and performance conditions
• the events that determine when commission is earned
• the timing and intervals of payment, in line with section 1 ERA 1996
• whether the scheme is contractual or discretionary
• whether and how the employer may amend or withdraw the scheme

Employers should note that variation clauses must be both clear and reasonable. A broad right to amend does not guarantee enforceability if the change is substantial or implemented without consultation.

Implied terms and custom and practice
Even where a scheme is described as discretionary, an implied contractual entitlement may arise through consistent and predictable practice. Tribunals consider the regularity and longevity of payments, the transparency of the scheme, and whether employees reasonably relied on the practice. Where employees depend on predictable commission payments, the employer’s ability to amend or withdraw the scheme becomes significantly limited.

Tribunals may also consider principles from cases such as Hartley v King Edward VI College and, where relevant, the “effective cause” reasoning familiar in commercial agency disputes, particularly when entitlement is unclear.

2. Unlawful deductions rules

Under the ERA 1996, employers may not make deductions from wages unless authorised by statute, by contract or with prior written consent. Once commission is earned under the contractual scheme, failure to pay it constitutes an unlawful deduction.

When commission is earned
Commission becomes wages only when contractual triggers are satisfied. If the scheme states commission is earned on receipt of payment from the customer, the entitlement does not arise earlier. If the scheme states it is earned at the point of sale, withholding payment despite customer cancellation may breach wages legislation unless a lawful clawback applies.

Disputed entitlement
Commission cannot be withheld due to internal disputes, administrative delays or customer issues if the contractual entitlement has already arisen. Employers must avoid “netting off” or offsetting amounts unless expressly permitted by contract.

Timing of payment
Paying commission late—outside the contractual payment interval—may also constitute an unlawful deduction. Employers should ensure payroll processes match contractual requirements.

3. Working Time Regulations and holiday pay

Holiday pay is one of the most significant legal issues for commission schemes. The Working Time Regulations require employers to pay workers their normal remuneration during statutory annual leave. Case law, including Lock v British Gas Trading Ltd, Bear Scotland Ltd v Fulton and Harper Trust v Brazel, confirms that regularly earned commission must be reflected in holiday pay calculations.

Normal remuneration
Normal remuneration includes any amount intrinsically linked to the performance of contractual duties and regularly received. Commission commonly meets these criteria.

Reference period
Employers must use a 52-week reference period for workers with variable pay. Weeks with no pay must be excluded, and fewer weeks may be used if the employee has not worked for 52 paid weeks.

Statutory vs contractual leave
This requirement applies to the 5.6 weeks of statutory leave only. Employers may apply the same calculation to contractual leave, but there is no legal requirement to do so.

Arrears and backdating
Underpaid holiday pay can be claimed as a series of deductions but is limited by the two-year backstop for arrears. Employers must ensure holiday pay calculations include all relevant commission to avoid accumulation of liability.

Section A Summary

Commission pay is governed by contractual principles and statutory protections that require accurate drafting, clear entitlement rules and compliant administration. Express and implied terms determine entitlement, and once commission is earned, it becomes wages protected under the ERA 1996. Holiday pay must reflect commission as part of normal remuneration using a 52-week reference period. Employers must draft clear rules, ensure lawful deduction mechanisms and maintain consistent practices to avoid disputes.

Section B: Structuring Commission Schemes Legally

Commission structures are effective only when they are clear, lawful and aligned with commercial objectives. Poorly drafted schemes expose employers to unlawful deductions claims, holiday pay arrears and disputes over when commission is earned. This section explains how employers should design and operate commission frameworks that minimise legal risk, comply with the ERA 1996 and WTR 1998, and support consistent HR administration. A robust scheme must define entitlement precisely, avoid ambiguous trigger rules and ensure that any deductions or clawbacks are expressly authorised.

A well-structured commission scheme should be explicit about how commission is generated, when it becomes payable and under what circumstances it may be lost, reduced or reclaimed. This includes ensuring compliance with the Braganza duty when exercising discretion, avoiding discriminatory decision-making, and integrating clear rules with wider employment law duties.

1. Contractual vs discretionary commission

The distinction between contractual and discretionary commission is legally significant. Labelling a scheme “discretionary” does not prevent it becoming contractual if, in practice, it is applied consistently and predictably. Tribunals examine the substance of the arrangement rather than the employer’s description.

Contractual commission
Where commission is contractual, the employer is obliged to pay it when the qualifying conditions are met. The employer’s ability to amend the scheme is limited unless a clear and reasonable variation clause permits changes after consultation. Contractual rights may arise from written terms, long-standing custom and practice, or representations made at recruitment that formed part of the contract.

Discretionary commission
Even discretionary schemes must be operated lawfully. Employers must:

• exercise discretion rationally and in good faith, in line with the Braganza duty
• avoid arbitrary or capricious decisions
• apply the scheme consistently across comparable employees
• ensure decisions are free from discrimination under the Equality Act 2010

Employers should ensure that discretionary language is supported by clear procedural rules, including objective criteria for awards and a transparent decision-making process. Failure to do so invites claims that the scheme is contractual by implication.

2. Trigger events and accrual rules

Unclear or poorly defined trigger events are a primary cause of commission disputes. Employers must define precisely when commission is earned and which conditions must be satisfied before payment becomes due. Ambiguous wording is interpreted in favour of the employee, particularly where commission forms a large part of remuneration.

Examples of contractual trigger events include:

• contract signature or completion of sale
• successful delivery or installation of the product or service
• receipt of payment from the customer
• expiry of a cancellation or cooling-off period
• satisfaction of internal credit or compliance checks

Commission schemes should also address situations involving discounted sales, refunds, credit notes, amended contracts and multi-year revenue streams. Failure to specify how these circumstances affect commission can lead to implied terms or inconsistent decisions that expose the employer to claims.

Avoiding disputes at termination
Scheme rules must clearly state whether commission accrues during notice periods, garden leave, termination for cause or termination without fault. Employers often seek to restrict accrual after notice is given, but such restrictions must be expressed clearly and cannot deprive an employee of commission already earned. Ambiguous provisions increase the likelihood of post-termination litigation.

3. Clawbacks, deductions and overpayments

Clawbacks are lawful only where expressly authorised by contract, compliant with the ERA 1996 and proportionate to the circumstances. Because earned commission is protected as wages, employers cannot simply reclaim payments unless a clear contractual mechanism permits it.

Lawful deductions
Deductions are lawful only when:

• authorised by statute
• authorised by an express contractual term
• agreed in advance by the employee in writing

Clawback clauses must be:

• specific and unambiguous
• linked to clearly defined events, such as cancellations or non-payment
• proportionate rather than punitive
• consistent with the principle that wages already earned cannot be withheld unlawfully

Negative commission balances
Employers who operate commission banks or negative balances must include detailed contractual wording explaining how deficits arise, how they are carried forward and how they are reconciled on termination. Without express agreement, deductions to recover negative balances may breach the ERA 1996.

Chargebacks for cancellations
Where customers cancel contracts, the employer may reclaim commission only if the clawback clause is sufficiently precise. If the cancellation occurs after the employee has earned commission under the scheme’s trigger rules, the employer must rely on a lawful clawback clause rather than withholding payment. Employers should avoid attempting to claw back commission from final salary unless expressly authorised.

Section B Summary

To minimise legal risk, employers must design commission schemes with clear contractual rules, legally compliant deduction mechanisms and precisely defined trigger events. Discretion should be exercised in line with the Braganza duty, with transparent and objective criteria. Clawbacks must be unambiguous and proportionate, and employers must specify how events such as cancellations, refunds and termination affect entitlement. Robust scheme design reduces disputes and ensures predictable, lawful administration of commission.

Section C: Holiday Pay, Sickness, Family Leave and Commission

Periods of leave create some of the most complex administrative challenges in commission schemes. Employers sometimes assume that commission is payable only when an employee is actively generating sales or meeting performance criteria. UK law takes a different approach. Where commission forms part of a worker’s normal remuneration, statutory frameworks require employers to reflect that variable pay in certain leave-related payments, notably holiday pay and some family-related entitlements. By contrast, statutory sick pay uses a narrower definition of earnings and does not include accrued but unpaid commission, although it may include commission if it was actually paid within the relevant earnings period. Contractual sick pay schemes may take a different approach depending on the employer’s policy wording.

This section examines the rules governing holiday pay calculations, statutory sick pay, maternity and other family-related payments, ensuring employers understand when commission must be included, the correct calculation periods and the compliance risks associated with exclusion or inconsistency.

1. Holiday pay calculations with commission

Holiday pay is the most heavily litigated area involving commission. The Working Time Regulations require employers to pay workers their normal remuneration during statutory annual leave. Case law including Lock v British Gas Trading Ltd, Bear Scotland Ltd v Fulton and Harper Trust v Brazel confirms that regular, results-based commission forms part of normal remuneration where it is intrinsically linked to contractual duties and paid sufficiently regularly.

Normal remuneration principle
Employees must not be financially disadvantaged for taking statutory leave. If commission is excluded from holiday pay, sales employees lose the opportunity to earn variable pay during leave, creating a disincentive that breaches the purpose of the Working Time Directive. Employers must therefore incorporate commission into holiday pay calculations for the 5.6 weeks of statutory leave.

Reference period: 52 weeks
Employers must calculate holiday pay for commission-based employees using a 52-week reference period. Weeks with no pay are ignored. Where an employee has fewer than 52 paid weeks, employers must use the actual number of paid weeks. This applies only to statutory leave, not necessarily to additional contractual leave unless the employer adopts the same approach by policy.

Arrears and backdating
Underpaid holiday pay may be claimed as a series of deductions, subject to the two-year backstop on arrears. Employers should review payroll processes regularly to ensure that historical commission payments are captured accurately in the reference period calculation.

2. Sick leave and statutory sick pay

Employers must distinguish clearly between statutory sick pay (SSP) and any enhanced contractual sick pay they offer.

Commission and statutory sick pay
SSP is calculated using “average weekly earnings” over the eight-week relevant earnings period before sickness begins. Only earnings subject to Class 1 National Insurance are included. Commission counts only if it was actually paid during this period, not when merely accrued. SSP does not require employers to mirror the broader normal remuneration principle used for holiday pay.

Contractual sick pay
Where an employer operates an enhanced sick pay scheme, the treatment of commission must be expressly documented. Employers should specify whether:

• accrued but unpaid commission is included
• previous commission earnings form part of the calculation
• a defined averaging method applies to variable pay

Ambiguity frequently leads to inconsistent practice or disputes. Employers should ensure that any formula holds equality considerations in view to avoid inadvertently disadvantaging groups with higher sickness absence rates.

3. Family leave (maternity, paternity, adoption, shared parental leave)

Statutory family leave payments apply different rules to holiday pay calculations. Employers must therefore understand how commission interacts with statutory and enhanced rights.

Statutory Maternity Pay (SMP)
SMP is calculated using the employee’s normal weekly earnings during the eight-week relevant earnings period ending with the 15th week before the expected week of childbirth (the qualifying week). Commission is included only if it was actually paid during this period and is subject to Class 1 NICs. Accrued but unpaid commission does not form part of SMP.

Enhanced contractual maternity pay
Employers offering enhanced maternity pay must ensure that scheme rules are clear about whether commission is included. Excluding commission without objective justification may give rise to indirect sex discrimination risks, especially where commission constitutes a substantial proportion of earnings.

Paternity pay, adoption pay and shared parental pay
These statutory payments use the same normal weekly earnings formula as SMP. As a result, only commission actually paid during the relevant earnings period is included. Employers with enhanced schemes should specify explicitly whether and how commission is incorporated to ensure consistent and non-discriminatory application.

Section C Summary

Commission interacts with leave entitlements in several distinct ways. For holiday pay, employers must include commission as part of normal remuneration using a 52-week reference period. For statutory sick pay and statutory family-related leave pay, only commission actually paid in the statutory earnings period counts. Enhanced contractual schemes may include or exclude commission, but rules must be clear to avoid ambiguity or discrimination. Consistent payroll processes and transparent policy wording are essential to lawful and fair administration.

Section D: Termination, Post-Termination Rights and Disputes

Commission disputes frequently arise on termination, particularly where scheme wording is unclear or employers attempt to restrict entitlement retrospectively. Employees who rely heavily on variable earnings often dispute whether they are entitled to commission for work completed before departure, for sales closing during a notice period or garden leave, or for ongoing revenue streams linked to accounts they previously managed. Employers, in turn, are concerned about paying commission where revenue has not yet materialised or where customer behaviour changes after an employee leaves. The legal position turns largely on contract wording, supported by statutory protections under the Employment Rights Act 1996.

This section explains how employers should draft and manage termination-related commission rules, what rights employees may assert where terms are ambiguous, and how to apply lawful and consistent processes to reduce litigation risk.

1. Commission after termination

The core distinction in post-termination disputes is between accrued commission and unearned or future commission. Employers must identify clearly when commission becomes earned under the scheme because once that point is reached, the entitlement is protected as wages and cannot be withheld.

Accrued commission
Commission already earned before termination must be paid, including where the employee is working their notice or on garden leave. Termination does not extinguish earned rights. Employers cannot insert retrospective restrictions to avoid payments. Withholding accrued commission risks unlawful deductions under the ERA 1996.

Future or unearned commission
Employers are generally not required to pay commission where the relevant trigger event occurs after departure, unless the contract grants such rights. When the scheme is silent or ambiguous, tribunals may consider whether the employee was the “effective cause” of the sale. Although this doctrine originates in commercial agency law, tribunals may use it as a persuasive tool when interpreting unclear commission schemes.

Deals closing post-departure
Where the contractual trigger depends on contract signature, revenue recognition or receipt of payment, and these events occur after employment ends, employers are usually entitled to withhold payment. However, where language refers simply to “successful sale” or “introduction of business”, employees may argue that they were the effective cause of the transaction and therefore entitled to payment. Clear drafting is therefore essential.

2. Garden leave and restrictive covenants

Garden leave presents unique issues because the employee remains employed but is prevented from performing duties. Unless the commission scheme expressly states that accrual ceases during garden leave, entitlement may continue if trigger events occur during that period. Employers cannot rely on garden leave as a mechanism to deprive employees of commission already earned or of commission that accrues under the scheme’s terms.

Clawbacks linked to restrictive covenants
Some employers attempt to make commission payments conditional on compliance with post-termination restrictive covenants. Such clauses must be drafted carefully to avoid becoming punitive or amounting to an unlawful restraint of trade. They must be clearly worded, proportionate and linked to legitimate business interests. Overreaching clawbacks risk unenforceability and unlawful deduction claims.

3. Dispute avoidance and litigation risk

Commission disputes are among the most common pay-related tribunal claims. Employers can reduce exposure significantly through clear scheme drafting, consistent decision-making and transparent communication.

Common triggers for disputes include:

• ambiguous or contradictory scheme wording
• withholding of accrued commission on or after termination
• disputes over accrual during notice periods or garden leave
• inconsistent or discriminatory application of discretionary powers
• retrospective changes to scheme terms
• failure to include commission in holiday pay calculations
• clawbacks without contractual authority

Best practice for reducing litigation risk:

• review commission schemes annually for legal compliance
• define accrual rules and trigger events precisely
• ensure managers avoid informal promises or off-contract assurances
• train payroll and HR teams on unlawful deduction rules
• avoid retrospective changes to schemes or entitlements
• record rationale for discretionary decisions to meet the Braganza duty

Section D Summary

Termination-related commission disputes usually arise from unclear drafting, inconsistent application or attempts to restrict entitlement retrospectively. Accrued commission remains payable even after termination. Commission may continue to accrue during notice or garden leave unless the scheme expressly provides otherwise. Future commission is not payable unless contractually agreed. Employers must draft clear, proportionate and legally compliant rules and maintain consistent documentation and decision-making to reduce litigation risk.

FAQs

1. Do employees have a legal right to commission?

Employees do not have a standalone statutory right to commission. Entitlement arises through contractual terms, commission plan rules or implied terms created by consistent custom and practice. Once commission is earned according to the scheme’s trigger rules, it becomes wages under the Employment Rights Act 1996 and must be paid. Employers cannot withhold earned commission unless statute or contract expressly authorises it. Although employers may design and revise commission schemes, they cannot unilaterally remove contractual rights or exercise discretion irrationally or in bad faith.

2. Can an employer change a commission scheme mid-year?

Yes, but only if the contract includes a clear and reasonable variation clause or if the employee agrees to the change. If the scheme is contractual, imposing unilateral changes risks breach of contract, constructive dismissal and unlawful deductions. Even where a scheme is described as discretionary, tribunals may find it contractual if applied consistently over time. Employers should consult affected staff, document the rationale for changes and secure written agreement wherever possible.

3. Is commission included in holiday pay?

Yes. Where commission forms part of an employee’s normal remuneration, it must be included in statutory holiday pay calculations. Case law, including Lock v British Gas, establishes that results-based commission must be factored into holiday pay for the 5.6 weeks of statutory leave under the Working Time Regulations. Employers must apply a 52-week reference period and include all relevant commission payments. Failure to do so may lead to unlawful deduction claims, including a series of deductions claim, subject to the two-year backstop.

4. Do employers have to pay commission during an employee’s notice period?

Commission must be paid during the notice period if it is earned under the scheme’s rules during that time. If commission accrues based on events that occur while the employee remains employed, it cannot be withheld. Employers may restrict accrual after notice is given only if the scheme expressly allows it and does not conflict with wages law. Retrospective changes are unlawful. Payroll processes should ensure commission earned during notice is paid promptly and accurately.

5. Can employers refuse commission if a customer cancels their order?

It depends on the scheme’s accrual rules. If commission is earned only after receipt of customer payment, cancellation before that point prevents entitlement. If commission is earned at the point of sale or contract signature, cancellation after that event does not remove the entitlement unless a lawful clawback clause applies. Employers cannot rely on general policy statements to withhold earned commission; clawbacks must be expressly authorised and proportionate.

6. Does commission count towards statutory sick pay?

Commission counts towards statutory sick pay only if it was actually paid during the relevant eight-week earnings period before sickness begins and is subject to Class 1 NICs. Accrued but unpaid commission is excluded. SSP does not apply the broader “normal remuneration” principle used for holiday pay. Employers offering enhanced contractual sick pay may include or exclude commission but must ensure scheme rules are clear to prevent inconsistent or discriminatory application.

7. Is an employee entitled to commission after leaving the company?

Employees are entitled to any commission earned before termination. This includes commission earned during notice or potentially during garden leave unless the scheme expressly excludes accrual during that period. Employers generally do not need to pay commission for events occurring after departure unless the contract says otherwise. Where the scheme is ambiguous, tribunals may consider whether the employee was the effective cause of the sale. Clear drafting is essential to avoid disputes.

8. Can employers operate negative commission balances?

Yes, but only where the employee has expressly agreed to this in writing. Negative balances count as deductions from wages and therefore must comply with the restrictive rules in the ERA 1996. Employers should define how deficits arise, how they carry forward and what happens at termination. Without a clear contractual basis, deductions to recover negative balances may be unlawful.

9. Can employers withhold commission while a performance or compliance investigation is ongoing?

Only if the commission scheme expressly links entitlement to passing compliance checks or meeting specific performance standards. Withholding commission without contractual authority risks an unlawful deduction claim. Employers may investigate alleged misconduct or compliance failures, but they cannot suspend commission payments if the entitlement has already arisen. Schemes should therefore include clear provisions addressing compliance failures and investigation processes to avoid ambiguity.

Conclusion

Commission pay is a powerful tool for driving performance, but it is also one of the most legally sensitive aspects of remuneration. Employers must ensure that commission schemes are drafted with clarity, administered consistently and integrated with broader employment law duties. Although there is no single statute governing commission, the Employment Rights Act 1996, the Working Time Regulations 1998 and relevant case law impose detailed requirements on how commission must be earned, calculated and paid. Once commission is earned under the scheme’s rules, it becomes wages and cannot be withheld unless expressly authorised.

The most common compliance risks arise from vague scheme wording, failure to include commission in statutory holiday pay calculations, inconsistent exercise of discretion, and attempts to restrict entitlement retrospectively on termination. Employers must also ensure that scheme changes follow correct contractual processes and that variation clauses are reasonable and applied transparently. Retrospective changes carry significant legal risk and should be avoided entirely.

A robust approach combines clear contractual drafting, well-defined trigger events, proportionate clawback mechanisms, equality-aware decision-making and accurate payroll administration. By reviewing schemes regularly, training managers on lawful deductions rules and maintaining transparent communication with employees, employers can minimise disputes and maintain trust while ensuring commission arrangements remain legally compliant and commercially effective.

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