Can An Employer Change Commission Terms?

Can you change an employee's commission structure? Usually, yes - but you need to check whether the commission terms are contractual first.

If the commission scheme is part of the employee's contract, you generally can't just replace it with a less generous plan because it suits the business better. You may need the employee's agreement, a proper consultation process and a clear written variation.

The good news is that commission changes don't have to turn into a dispute. With careful wording, a sensible transition plan and good records, you can adjust your sales incentives while reducing the risk of breach of contract, unlawful deduction from wages or unfair dismissal claims.

Can An Employer Change Commission Structure?

Yes, you can change a commission structure, but not always unilaterally. The safest approach depends on whether the current commission terms are contractual, discretionary or somewhere in between.

Commission can be a contractual entitlement if it's written into the employment contract, a commission agreement, an offer letter or another document that clearly forms part of the employment terms. If that's the case, reducing commission or changing how it's earned without agreement can amount to a breach of contract.

It can also create a risk under the Employment Rights Act 1996. Commission is usually treated as wages once it's properly earned. If you hold it back, reduce it or change the rules after the employee has already earned it, the employee may argue that you've made an unlawful deduction from wages.

On the other hand, some commission schemes are genuinely discretionary. For example, your documents might say that you can vary or withdraw the plan at your discretion, and that commission is only payable if certain conditions are met. Even then, you should use that discretion carefully and consistently. A court or tribunal can still look at whether you've acted in bad faith, irrationally or in a way that contradicts the wording of the documents.

As a practical rule, treat any commission change as something that needs:

• A review of the existing contract and commission documents
• A clear business reason for the change
• Consultation with affected employees
• Written confirmation of the new terms
• A plan for commission already earned or close to being earned

This is especially important if your sales team has relied on the existing structure when accepting the role or planning their income.

How Do I Know If Commission Terms Are Contractual?

You can usually tell whether commission terms are contractual by checking where the promise is written, how specific it is and how your business has treated it in practice.

Start with the employment contract. A commission clause employment contract might say something like, you'll be entitled to commission calculated at 5% of net sales revenue received from customers introduced by you. That sort of wording usually points strongly towards a contractual right.

Then check any separate sales commission agreement, commission plan agreement, staff handbook, offer letter, email confirmation or onboarding document. A separate commission document can still be contractual if the employment contract incorporates it, or if the wording shows that both sides intended it to be binding.

Signs that your commission terms may be contractual include:

• The plan uses definite wording such as will be paid or is entitled to
• The rate, trigger and payment date are clearly set out
• The contract says the commission plan forms part of the employment contract
• You have paid commission in the same way for a long time
• Employees have been told that commission is part of their remuneration package

Signs that the plan may be discretionary include:

• The documents say commission is discretionary or non-contractual
• You reserve a clear right to amend, suspend or withdraw the scheme
• The plan is reviewed each year and employees are told this
• Payment depends on business approval, performance thresholds or other conditions

Be careful with labels. Calling something discretionary doesn't automatically make it risk-free if the rest of the wording promises payment once a sale is made. Tribunals look at the substance of the arrangement, not just the label.

Also check whether a pattern has developed over time. If you've paid commission in a consistent way for years, employees may argue that the arrangement has become part of their contract through custom and practice.

What Process Should You Follow Before Changing Commission Terms?

You should follow a fair consultation and written variation process before changing commission terms, especially if the change reduces what employees can earn.

There isn't one single process that fits every business. A small change to clarify when commission is paid may only need a short written explanation and signed variation. A major reduction in commission rates across a whole sales team needs more care.

Step 1: Check What The Current Documents Say

Review the employment contract, commission plan, offer letter, staff handbook and any side emails about commission terms. Look for wording about variation, discretion, notice, leavers, clawbacks and when commission is earned.

Step 2: Identify The Business Reason

Be ready to explain why the change is needed. For example, your margins may have changed, the sales cycle may be longer than expected or the old structure may reward low-quality deals that don't convert into revenue.

Step 3: Consult Before You Decide

Consultation should happen while the proposal is still open to feedback. Tell employees what you're proposing, why you're proposing it, when it would start and how it affects pipeline deals. Give them a genuine chance to ask questions and suggest alternatives.

Step 4: Deal With Existing And Pipeline Commission

This is where many disputes start. Be clear about sales already closed, invoices already paid, deals in negotiation and renewals. If an employee has already earned commission under the old rules, changing the plan after the event is much riskier.

Step 5: Confirm Agreement In Writing

If the employee agrees, use a written variation letter or updated commission plan agreement. The document should say what is changing, when it starts and whether all other employment terms stay the same.

If you're proposing to dismiss and re-engage 20 or more employees at one establishment within 90 days, collective consultation obligations may apply under the Trade Union and Labour Relations (Consolidation) Act 1992. The minimum consultation period is at least 30 days before the first dismissal for 20 to 99 proposed dismissals, and at least 45 days for 100 or more. Get tailored advice before you go down that path.

What Should A Commission Clause Employment Contract Say?

A good commission clause should say exactly how commission is earned, calculated, paid and changed. Vague wording is one of the biggest reasons commission arrangements end up in disagreement.

If you're hiring sales staff or updating an existing plan, don't rely on a one-line clause that says commission is payable as agreed from time to time. That may leave too much room for argument when targets are missed, customers cancel or an employee leaves.

A lawyer should tailor the wording before you use it, but a practical outline might include:

1. Scheme Status: Say whether the scheme is contractual, discretionary or partly discretionary, and how it connects to the employment contract.
2. Eligibility: Set out which roles are eligible and whether the employee must still be employed on the payment date.
3. Commission Trigger: Define when commission is earned, such as when the contract is signed, the invoice is issued or the customer pays cleared funds.
4. Calculation Method: State the rate, formula, margin basis, exclusions, VAT treatment and any caps or thresholds.
5. Targets And Territories: Explain targets, sales territories, lead allocation and what happens if accounts move between employees.
6. Payment Timing: Say when commission is paid and what information will be provided with the payslip or commission statement.
7. Refunds And Clawbacks: Cover cancellations, bad debts, refunds and whether deductions can be made from future payments.
8. Leavers: Say what happens to commission after resignation, dismissal, garden leave or notice periods.
9. Changes To The Scheme: Reserve a clear right to review and vary the scheme, and explain how notice of changes will be given.
10. Disputes: Set out who reviews commission queries and what records will be used to check calculations.

Clawbacks need particular care. If commission has genuinely been overpaid, the Employment Rights Act 1996 allows recovery in some circumstances, but you should still handle this carefully and transparently. If you want to claw back commission because of cancellations, refunds, bad debts or later events, make sure the contract or commission plan gives clear written authority for the deduction.

Also remember holiday pay. Where commission is regular and linked to the employee's normal work, it may need to be reflected in holiday pay calculations under the Working Time Regulations 1998 and relevant case law. If your sales team earns a large part of their pay through commission, get advice on the payroll treatment before changing the scheme.

What If An Employee Refuses The New Commission Plan?

If an employee refuses the new commission plan, you shouldn't simply impose it and hope for the best. You need to decide whether to negotiate, keep the old terms for that employee or consider a more formal process.

Your options usually include:

• Negotiate The Terms: You might adjust the start date, protect existing pipeline commission or offer a transitional guarantee.
• Keep The Current Terms: This may be sensible if only one employee is affected or the change isn't commercially critical under their employment contract.
• Introduce The Change For New Hires Only: This avoids forcing a change on current staff, although it can create different pay structures within the team.
• Dismiss And Offer Re-Engagement: This is a higher-risk option where you terminate the old contract and offer a new one on revised terms.

Dismissal and re-engagement should be a last resort, not a shortcut. ACAS guidance and the statutory Code of Practice on Dismissal and Re-engagement expect you to consult properly, share information, consider alternatives and avoid using dismissal as a threat to pressure employees into agreement.

If the Code applies and you unreasonably fail to follow it, an employment tribunal can increase certain compensation awards by up to 25%. Unfair dismissal rules are also an area of ongoing employment law reform, so you should check the current position before relying on dismissal as part of a commission change.

If you do dismiss and offer re-engagement, notice matters. Statutory minimum notice is one week after one month of employment, then one week for each complete year of service from two years onwards, up to a maximum of 12 weeks. The employment contract may require a longer notice period.

For many SMEs, the better commercial answer is a carefully managed transition. For example, you might keep the old rate for deals already in the pipeline, introduce the new rate for new leads from a fixed date and add a temporary floor for the first two months.

How Can You Handle An Employee Commission Dispute?

You should deal with a commission dispute quickly, in writing and by checking the documents before taking a firm position.

Say Maya runs a wholesale homewares business with three sales employees. One employee, Tom, earns 8% commission when customer invoices are paid. Maya wants to move the team to 5% commission plus a quarterly performance bonus from 1 July.

On 20 June, Tom closes a £40,000 order under the old plan. The customer pays on 10 July. At 8%, Tom expects £3,200. Maya's new plan would only pay £2,000 on that sale. If Tom had already done everything required under the old scheme and the only remaining step was customer payment, applying the new 5% rate to that deal could easily trigger a dispute.

A cleaner approach would be:

• Pay Tom £3,200 for the £40,000 order under the old plan
• Apply the new 5% rate only to leads created from 1 July
• Confirm the cut-off rules in the variation letter
• Keep a written record of consultation and agreement

If a dispute has already started, work through it in this order:

1. Pause Any Further Deductions: Don't make extra deductions until you've checked the basis for recovery and any written authority you may need.
2. Gather The Records: Collect contracts, commission plans, payslips, CRM records, invoices, customer payment dates and emails about the scheme.
3. Check When Commission Was Earned: Focus on the trigger in the document, not just when payroll was due to process the payment.
4. Respond In Writing: Explain your calculation, attach the relevant records and invite the employee to raise anything you may have missed.
5. Use Your Grievance Process: If the employee is unhappy, handle it under your grievance procedure and keep notes of meetings.
6. Get Help Before Positions Harden: Legal advice early can often turn a dispute into a calculation issue rather than a tribunal claim.

Employment tribunal claims for unlawful deductions from wages usually need to be started within three months less one day of the deduction, subject to ACAS Early Conciliation. That timeframe can come around quickly, so don't leave commission complaints sitting unanswered.

Key Takeaways

• You can change commission terms, but you need to check whether the current plan is contractual before making changes.
• Commission that's already been earned is much harder to reduce without risking a breach of contract or unlawful deduction claim.
• A fair consultation process, clear business reasons and a written variation letter can make the change much safer.
• Your commission clause should cover triggers, calculation, payment timing, leavers, clawbacks and how future changes will be handled.
• If employees refuse the change, dismissal and re-engagement is a higher-risk last resort and should be handled carefully.
• Good records are your best friend if an employee commission dispute comes up later.

If you'd like help with commission clauses, employment contract variations, consultation processes or commission disputes, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.