Is it legal to pay employees salary that is only based on commission?

Discussion in 'Legal' started by shortlist, Jan 22, 2009.

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  1. shortlist

    shortlist UKBF Newcomer Free Member

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    Well, I'm considering to employ someone as a Consultant who would only get paid on successful Sale.

    Is this legal?
     
    Posted: Jan 22, 2009 By: shortlist Member since: Sep 25, 2008
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  2. Richie N

    Richie N UKBF Big Shot Free Member

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    Yes but they would need to be self employed and invoice you for their fees/commission.
     
    Posted: Jan 22, 2009 By: Richie N Member since: Nov 1, 2006
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  3. maxine

    maxine UKBF Legend Full Member

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    ... and if they are self employed they need to be able to show that they are working for other people and not just you otherwise they could be treated as an employee.

    If you have employees on commission only you also need to show that they are realistically able to earn above the national minimum wage.

    There is some more info on this site that might help you

    http://www.direct.gov.uk/en/Employment/Employees/Pay/DG_10037277

    :)
     
    Posted: Jan 22, 2009 By: maxine Member since: Oct 13, 2007
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  4. sjbeale

    sjbeale UKBF Ace Full Member

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    You must draw up an agreement which contains the full terms and conditions of your arrangement. This will include payment on a commission-only basis outlining what they will need to achieve to get the commission and what the %age will be.

    You will also need to include details in there that they are employed on a self employed basis and responsible for their own tax and NI.
     
    Posted: Jan 22, 2009 By: sjbeale Member since: Jul 8, 2005
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  5. NCA

    NCA UKBF Newcomer Free Member

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    It isnt possible to employ someone and only pay them on comission. It is possible to employ someone on the basis that if their commision income falls below the minimum wage level you will make up the shortfall so their income is at the minimum wage level.
     
    Posted: Jan 22, 2009 By: NCA Member since: Jan 22, 2009
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  6. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    The lookout with that is that if the Revenue decide further on down the line that the arrangement and/or the contract was not self-employment but employment, they'll chase you as the employer for around 13% employers' national insurance. Even more annoyingly, what would then be your employee can come back to you and say some or all of the following to enforce his newly acquired employee rights:

    You owe me holiday pay;
    What you paid me didn't meet the minimum wage requirements;
    You didn't give me proper notice when you dismissed me (ie wrongful dismissal);
    Everything you paid me I am going to treat as net pay, and you owe the Inland Revenue the income tax and employees' national insurance.

    Re: the last one on that list, you might get an employee to sign to say he is responsible for his own tax and NI because he is self-employed, but if the Revenue decide he was an employee then you are on a sticky wicket - moreso if the employee has moved on and you become the softer target.

    For those reasons, a lot of people in your position insist that anyone they take on works through their own limited company. That transfers all the risk to the "employee" because his limited company would be responsible for all tax and national insurance, both employers' and employees'. If you hire someone on a self employed basis, you are always going to be exposed, unless you give the contract to the Revenue to adjudge beforehand whether the working practices and contract is akin to self-employment (a contract for services) or employment (a contract of service). Be prepared for a three month wait while they make up their minds.

    I think I have a solution for employment that would work for you. I'll give it some thought while I fill in this next tax return :)
     
    Posted: Jan 22, 2009 By: Wild Goose Member since: Aug 15, 2008
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  7. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    Ahha well done NCA. Sound point. So effectively you have to pay your employees a guaranteed retainer equal to the minimum wage. I'll borrow that and weave it in if I may.

    I'd harped on about self-employment in my previous post - it's cheaper than having an employee because you'd save employers' NI 13% plus no minimum wage worries. But it's not without its risks - will cost you if the Revenue decide there's an employment situation.

    If you want to go the employment route, what I think would give you the best deal would be a zero hours contract. It's not all that different to an ordinary contract of employment, but with one or two important tweaks and omissions. Effectively you employ someone without guaranteeing them any hours of work per week - hence its name - but can call on them to work as and when needed. It's what temping agencies and other employers with variable workloads use.

    Of course, your guy will have more autonomy than a temp sat in an office, but you might agree that he works say a nominal hour each day at minimum wage - beats guaranteeing him minimum wage for the whole 8 hours in a day. Should also gets you around Maxine's point earlier in the thread, that your employee must be able to attain a realistic working wage (because he's only working 5 hours per week on paper then presumably he would only need to achieve 5/38 (pro-rata 5hrs out of 38hrs in a working week) of whatever a living wage is. I'd check out Maxine's link to be certain. So that's a Zero hours contract - get help preparing one - because you know what you want and do not need your accountant or payroller to spend time researching the matter, you've halved the cost.

    Alternatively, the absolute safest and cheapest way is to make your bloke set up his own limited company - I guess you could even lend him the £100 if he's strapped - and put all the responsibility in his court. Then you would have no greater legal or tax worries (ie none at all) than when you hire a limited company in to design your website, market for you, or fill in these ***ing tax returns ;)
     
    Last edited: Jan 22, 2009
    Posted: Jan 22, 2009 By: Wild Goose Member since: Aug 15, 2008
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  8. maxine

    maxine UKBF Legend Full Member

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    Thanks WG, some of that was what I thought already but you have filled in a few other gaps for me also :)
     
    Posted: Jan 22, 2009 By: maxine Member since: Oct 13, 2007
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  9. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    Hi Maxine,

    Well I haven't even started on temp contracts yet.

    Frustrates the hell out of me, that people end up picking up someone else's tax bill a year down the line. Esp when it's so easy to get it right from the outset. Truthfully, 75% of our biz comes from after the event stuff where people jump in blind, when a stitch in time would have saved ... well I dunno.... nine I suppose ;) Comes home to roost this time of year in tax return season.

    Ok, on to the next tax return.... urghhh this one needs a whole singin' and dancin' set of accounts. Ouch!
     
    Last edited: Jan 22, 2009
    Posted: Jan 22, 2009 By: Wild Goose Member since: Aug 15, 2008
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  10. BusinessIdeas

    BusinessIdeas UKBF Newcomer Full Member

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    In the cash loans business all agents are self employed and only get paid on results. I can't really believe that Provident have got this wrong?
     
    Posted: Jan 22, 2009 By: BusinessIdeas Member since: Aug 23, 2006
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  11. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    Provident will have hammered out with the Revenue the details of their agents' contracts and agreed beforehand that the working practices and the agreement (the contract for services) reflects self-employment. Obviously small firms would have to put a lot of effort and resources into that.

    Not convinced? Allow me to give you a flavour. There are three or four key issues that the Revenue look closely at, one of which is called the substitution clause. Broadly, they look for a clause in a contract that allows the subbie to not turn up in person but to substitute a suitably competent replacement. Happens in building sites, IT, consultants' contracts. Of course, if anyone ever invoked the terms of that contract then the brother in law replacement would be kicked off the job in five minutes flat. I'm reminded of Phil Spector, who produced and actually sang in the worst song ever entitled "Do The Hustle": it was the tenth song of a series of ten he was contracted to produce, and being generally hacked off with the record company he fulfilled it with substitute singers, hmself included. Phil was not a good singer, esp with no wall of sound.

    Other things the Revenue look for are eg whether the person hired has to put right their mistakes at their own expense and time if they foul up; and whether they have to provide their own equipment. There's other factors - no hard and fast rules, and it's rigged in the Revenue's favour because they are judge and jury and, unlike Churchill the Bulldog, are trained to shake their heads and say "oh, no!" More often than not that happens after the event a year down the line, after the employer has racked up a cricket score in employers' NI and other potential taxes.

    Of course, a big player like Provident see that a mile off and get their accountants to fix them up safely beforehand. Ha - and you thought we just counted beans all day! :)
     
    Last edited: Jan 22, 2009
    Posted: Jan 22, 2009 By: Wild Goose Member since: Aug 15, 2008
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  12. maxine

    maxine UKBF Legend Full Member

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    Hi Wild Goose

    Zero hours contracts works well for our plumbing and plastering business and also for telemarketing although I do get in a tiz when it comes to working out holiday pay (though luckily dp048 did help me with a spreadsheet for that :))

    I also spotted today that you can now get IR35 insurance :) http://www.coulsonpritchard.com/ir35insurance/

    Given your points, do you think that is worthwhile for a small business to take out?

    ps - sorry to hijack thread but op hasn't been back so didn't think it was too impolite :)
     
    Posted: Jan 22, 2009 By: maxine Member since: Oct 13, 2007
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  13. BusinessIdeas

    BusinessIdeas UKBF Newcomer Full Member

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    Hi Goose. Yep I cant argue with any of that, just pointing out that it is possible, and obviously if small firms can copy the basic model of the large ones that are using self employed staff successfully then they should be ok?
     
    Posted: Jan 22, 2009 By: BusinessIdeas Member since: Aug 23, 2006
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  14. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    Hi Crewgirl,

    Copying something that works is always a sound plan. We have quite a few builders on the books, and when one of them comes up with the latest watertight contract for services for subbies it gets passed around the grapevine and it's beers all round!

    But in any other industry - IT for example - that just seem to doesn't happen. Maybe because they're all so secretive and in competition with each other? If you get hold of a Provident contract for services and copied it then I think you're right, you'd be safe as houses.

    Hey, just a minute - are houses safe? Mine's losin' money! :)
     
    Posted: Jan 22, 2009 By: Wild Goose Member since: Aug 15, 2008
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  15. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    Hi Maxine,

    That's an interesting one.

    As you probably know, anyone connected with financial services - bank manager to bookkeeper - has to spy on their clients and report anything suspicious under MLR, or otherwise face the death penalty. A guy that rang me regularly about investigation insurance made me think that there must be a massive hole in the fence, given that any money laundering report would probably spark an investigation. And at insurance rates, which we all know and love.

    So I could report our (insured) clients, sit back and wait, then rake in the investigation insurance. I reckon I could spin out an average investigation for a good three years ;)

    Truth was, when the smallprint was put under the 'scope there were so many exclusions it was hard to imagine a scenario when any client might be eligible to claim.

    That's where I am on investigation insurance Max. I reckon IR35 insurance would be similar.

    Glad to hear Jenni's taught David how to use a spreadsheet. They use them in Wiltshire for solving complex mathematical equations, mostly to do with crop circling. For zero hour contracts, I know a lot of the big user agencies uplift their basic pay rates to factor in 28 days' stat holiday pay, around 10% uplift (it's 28/292 uplift if you have 292 working days in your year, and 8 days' bank hols), which avoids most of the hassle of worrying about who worked when. They're just paying them the holiday pay at the end of each week as they earn it.

    Wouldn't bother with the insurance though - in the building game you're on safer ground than most.

    Bed-time everyone. G'night Jon-boy.
     
    Last edited: Jan 22, 2009
    Posted: Jan 22, 2009 By: Wild Goose Member since: Aug 15, 2008
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  16. BusinessIdeas

    BusinessIdeas UKBF Newcomer Full Member

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    You mention money laundering Goose, and in my business we have to delegate an individual in the company who is responsible for ensuring that any suspicious activity is reported. When applying to be licensed by the OFT all those systems have to be in place for you to be considered for a CCL. They have tightened up on all the criteria for loan companies, including early settlement regulations, advertising, data protection etc. Fortunately for us we have had all that sorted out for a long time.
     
    Posted: Jan 23, 2009 By: BusinessIdeas Member since: Aug 23, 2006
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  17. Wild Goose

    Wild Goose UKBF Newcomer Free Member

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    Interesting. They've actually loosened up on us accountants, Crewgirl. The MLR 2007 leaves far more open to interpretation than the old regs ever did. I trawled through most of the major bodies' advice to members sheets until I found an interpretation I liked (at the AAT's site).

    Seems we don't much need to bother with mugshots now - even on "enhanced" id for distance clients. Getting sign-ups to pay their first instalment from a personal bank account is, according to the AAT, a sound alternative. So that's a utility bill and a cheque up front, please. :)

    Maybe I should join the AAT. I certainly like their relaxed MLR interpretations and intend to adopt them the moment tax season ends.
     
    Posted: Jan 23, 2009 By: Wild Goose Member since: Aug 15, 2008
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