Is commission creating a time-bomb for recruitment businesses?

Charlie Barnes, head of employment legal services, provides guidance and highlights potential pitfalls for recruitment businesses around fair pay, including National Minimum Wage and holiday pay.

Fair pay compliance

The issue of fair pay is currently at the forefront of government, union and regulator agendas. As a result, it is now a crucial area of compliance for businesses.

The recent increase in the National Living Wage (NLW) and new legislation concerning holiday pay are putting more pressure on employers. They are now compelled to review their practices and their employment terms and conditions to avoid the financial and reputational consequences of non-compliance.

Recruitment businesses may find themselves particularly vulnerable due to their commission and bonus plans.

National Minimum Wage

On 1 April 2024, the NLW increased from £10.42 to £11.44 p/hr, with the age threshold dropping from 23 to 21, resulting in up to a 20% pay increase. This will put pressure on employers who might have previously considered themselves compliant with the National Minimum Wage.

In the Department for Business and Trade’s most recent list of employers found to be in breach of the National Minimum Wage (NMW), 524 employers had underpaid 172,000 workers a total of £16m. A recruitment business topped the list, having underpaid its workers a total of £5m, which would have resulted in a further financial penalty of up to £10m.

While the employment of temporary workers may have been the cause for the underpayment, recruitment businesses could now be exposed to NMW risks related to their permanent workforce. One of the main reasons for NMW underpayments in the latest naming round was the incorrect categorisation of workers (salaried, time, piece-rate or unmeasured). This is a critical factor in assessing NMW compliance as it determines the applicable working time rules.

A common misconception is that workers who receive a salary are categorised as ‘salaried’ for NMW purposes. However, this is incorrect. There are four conditions that must be met under the terms of the worker’s employment contract for a salaried categorisation. One of these is that the worker is only entitled to certain payments for working their basic annual hours, excluding monthly commissions. The result is that a worker who earns a monthly commission will be categorised as an ‘unmeasured worker’ and not ‘salaried’. This means they must be paid at least the NMW each month rather than over the course of the year, as is the case for ‘salaried workers’.

Historically, this would not have been an issue when basic pay was well in excess of the NLW and was topped up by commission payments. However, with the NLW now equivalent to a basic salary of approximately £23k, there may be lean months where no commission is earned, and their basic pay may not meet the NLW. In such instances, top-up payments must be paid in that month to avoid a NMW underpayment. This is before considering other risks such as salary sacrifice and working time.

Holiday pay

On 1 January 2024, new legislation concerning holiday pay was introduced. This legislation confirmed how holiday pay should be calculated for workers who are paid a basic salary and are entitled to additional payments such as commission, overtime and in some cases, bonuses. Employers must ensure that these additional pay components are factored into the holiday pay for four weeks of a worker’s holiday entitlement, provided certain conditions are met.

It’s important to note that this new legislation is based on existing case law principles related to the calculation of holiday pay for UK workers. A recent Supreme Court decision has also confirmed that where employers are found to be underpaying holiday pay, claims can go back up to two years for each impacted worker in England, Scotland and Wales. In Northern Ireland, claims can go back to 1998.

The change leaves recruitment businesses particularly exposed, given that they often incentivise their workforce through entitlements to commissions and bonuses. Businesses that do not review their payment practices and adapt their employment terms and conditions to comply with the new requirements risk exposure to two years’ worth of holiday pay arrears for all impacted workers.

What should recruitment businesses be doing?

Understandably, rewarding and incentivising people through commission and bonuses is unlikely to change. However, the increased government focus on fair pay issues and the potential reputational and financial consequences of non-compliance mean the risks cannot be ignored.

Recruitment businesses should regularly review their payment practices to ensure they remain competitive and incentivise their workforce, without compromising on compliance.

To discuss the potential impact for your recruitment business, please contact Charlie Barnes.