A commission is an entitlement to compensation based on attaining a target. Unlike a bonus, which may be one-off, highly discretionary and based largely on qualitative factors, commissions tend to be recurring and based on concrete quantitative variables, such as sales volume or accounts receivable collections. That said, employers still retain extensive discretion over commission structures and entitlements.

Employers should remember the following five things when designing and operating commission schemes:

1. Although commissions motivate and compensate employees, the ultimate objective of commissions is to drive improved sales or other outcomes.
2. Employment standards, including those governing minimum wages, vacation pay, and overtime, typically apply.
3. Commission is subject to Canada Pension Plan (CPP) and Employment Insurance (EI).
4. Payroll may need to process additional forms for commission employees, including TD1X – Statement of Commission Income and Expenses for Payroll Tax Deductions and T2200 – Declaration of Conditions of Employment.
5. Commissions should form part of the evaluation for notice pay when terminating employees.

Design commission structures to achieve the desired sales or other outcomes. For instance, vary commission rates according to product margins (higher margins, higher commission rates to drive sales). Some employers share commissions between two or more employees (split commissions) to incentivize and recognize team efforts.

Human resources and payroll departments should remember that absent explicit exemptions, employment standards will likely apply to the treatment of commissions and commission employees for matters like minimum wages, overtime pay, and vacation pay. Typically, vacation pay is calculated on commissions. Additionally, commission employees are usually entitled to minimum wages under minimum wage standards and absent specific exemptions.

Therefore, an employee paid by commission alone must receive a pay top-up to get them to the minimum wage. And, although commission earnings may be irregular and an employee may have exceptionally high earnings in one pay period, employers cannot offset earnings between pay periods when calculating the minimum wage top-up.

Like other wages, commissions are subject to various statutory deductions and the rules governing them, including CPP, EI, and income tax. Calculations for statutory deductions may require adjustment depending on the frequency and fluctuation of commission payments. For instance, if commission payments are periodic or irregular, the payroll department may use the bonus method to calculate income tax deductions. The bonus method is a middle ground for a more accurate estimation of tax deduction, balancing the tax on higher than usual or fluctuating income while recognizing that the employee will not receive this exact or higher wage amount for every other pay period. See Canada Revenue Agency’s (CRA)’s website.

Payroll may need to process additional tax forms because of commissions. For instance, commission employees may require a T2200 if the employer requires them to pay employment expenses. See CRA’s website for a copy of the T2200 – Declaration of Conditions of Employment.

Additionally, employees may wish to adjust the amount of income tax withheld from their pay because of the variable and irregular nature of commissions. In that event, employees may submit the required form for payroll to process, namely, form TD1X – Statement of Commission Income and Expenses for Payroll Tax Deductions. The TD1X is in addition to the standard TD1 form applicable to all employees. See CRA’s website.

A pivotal aspect of commissions that requires clarity is the definition of when commissions are “earned.” Until commissions are earned, an employee is not entitled to them. The employer has immense discretion to specify the point at which commission is earned. But if the employer does not clearly identify the point when commission is earned, there may be disputes and a court, tribunal, or other adjudicative body will impose the terms it deems fit.

For example, the commission agreement may only state that an employee is entitled to commission once a sale is made. With this simple term, an employee or court could insist that an employee is entitled to commission once a sale is made or agreed to, regardless of whether the customer takes delivery or pays for the goods or services.

A clearer commission agreement would state that the employee is not entitled to commission, and commission is not earned until the customer pays for the goods, takes delivery of the goods, or any other permutation the employer designs.

For further clarity, the commission agreement could state that the employee is not entitled to a commission if they are not actively employed when the commission would have otherwise been considered earned.

There are even more grey areas if, for example, a sale is initiated but not completed until after separation—that is, a grey area can exist if the commission agreement has no or unclear provisions.

Meeting your duty of care

Ensure the accurate and consistent treatment of commissions in compliance with accounting standards, employment standards, employment agreements, remuneration policies, and payroll-related legislation. The Finance and Accounting library in PolicyPro®, particularly SPP FN 4.04 – Commissions and SPP FN 1.03 – Sales Commissions include guidance. Also refer to the Human Resources library in PolicyPro® as well as the Human Resources Advisor®, which is an AI Assistant from First Reference that provides information and answers to manage HR and payroll risks.

Policies and procedures are essential, but the work required to create and maintain them can seem daunting. The Finance and Accounting, Operations and Marketing, Not-for-Profit, and Information Technology libraries in PolicyPro®, co-marketed by First Reference and Chartered Professional Accountants Canada (CPA Canada), contain sample policies, procedures, checklists and other tools, plus authoritative commentary to save you time and effort in establishing and updating your internal controls and policies. Find out more about PolicyPro® and book a demo here.