Debit-credit remuneration structures – are they worth the risk?

Many principals of real estate agencies across Australia have long preferred to employ sales agents under a ‘debit-credit’ retainer whereby the employed agent is paid a base wage, on the basis that all sales commission earned in excess of the base wage and expenses, is paid to the employee. 

The benefit to the employer under such an arrangement is that the commissions earned by the employee are set-off against the employer’s costs (including base wage, allowances, and leave payments etc.). A debit-credit retainer can also be a useful tool for assessing, and incentivising, the productivity of an employed agent.

As to the benefits for employees, debit-credit retainers provide the security of a regular base wage, to relieve them of any shortfall in income during periods in which settlement of sales transactions and payment of commissions is not scheduled or anticipated. 

Of course, where the employee fails to generate commission entitlements in excess of the base wage, a negative balance will remain on the employee’s commission account, requiring the employee to earn additional commissions into the future to re-pay the employer for the base wage “owed” under the retainer. 

While the adoption of a debit-credit remuneration system is not unlawful per se, there are some very real risks which may arise under such an arrangement.

The most significant risk posed by a debit-credit retainer is that of underpayment of prescribed entitlements. 

Prescribed Employee Entitlements

Principals will be aware of their obligation to ensure that an employed agent is paid in accordance with the minimum terms prescribed by the Real Estate Industry Award 2020 (Award) and the National Employment Standards (NES).

The Award sets out the minimum level of remuneration to which an employed agent is entitled to be paid, having regard to their classification.

Importantly, the Award also prohibits commission-only retainers which allow for pre-payment of leave entitlements by way of “all inclusive” commission payments.   

Where a debit-credit remuneration system is adopted, it is critical to ensure that the method of payment does not, at any time, result in the employee earning less than the minimum wage, allowances, superannuation and leave entitlements prescribed by the Award.

Given the manner in which debit-credit retainers generally operate, the avoidance of such risks can become very difficult to manage on an ongoing basis. That is, regular evaluation of the employee’s financial performance becomes necessary to ensure that any risk of underpayment may be appropriately managed.

Calculation of Entitlements and Record-Keeping

As with any employment agreement, a debit-credit agreement must clearly specify the method or formula for the calculation of commission entitlements due to the employee. 

An employer is obliged to maintain clear and accurate records in order to demonstrate that all entitlements and/or deductions have been calculated and applied pursuant to the terms of the agreement.  Where an employer is unable to produce substantiating payroll records, the corporate entity and its directors/principals may be exposed to a finding of contravention.   

Minimum Requirements for Commission-only Agreements

The Award is explicit as to the minimum requirements applicable to commission-only agreements generally. 

That is, in order to qualify for a commission-only retainer, an agent must demonstrate that he/she has met the Minimum Income Threshold Amount (MITA), and he/she must continue to demonstrate satisfaction of the MITA within the prescribed period each year thereafter in order to continue under such an agreement. 

Principals should, therefore, urge any employee wishing to enter into a debit-credit retainer to seek independent advice as to whether the proposed terms of the agreement have the potential to compromise their ability to satisfy the MITA such as to prevent their right to enter into a commission-only retainer in the subsequent year.

Additionally, principals should carefully assess an employee’s entitlement to transition to, or continue under, a commission-only retainer, every 12 months. 

Take-Aways

While a debit-credit system of remuneration is not, of itself, unlawful, principals and employees should carefully consider the benefits and potential risks of a debit-credit agreement prior to entry into such an arrangement.

The penalties for underpayment of employee entitlements or failure to maintain appropriate records can be significant, and where a Court finds that an employer has knowingly or recklessly engaged in a serious breach of the applicable workplace laws, the employer entity and/or its directors/principals may be exposed to criminal sanctions. 

Additionally, should a Court find that an employer has failed to properly account to an employee for all entitlements due to them in the course of their performance of their workplace services, the employer may suffer considerable reputational harm as a result of the adverse decision (being one which will generally be a matter of public record).  

For these reasons, principals seeking to engage workers under a debit-credit retainer are strongly urged to seek advice from a suitably qualified legal practitioner prior to formalising the agreement, to ensure that its terms properly comply with the Award and the NES, and that the parties are clear as to the manner in which all employee entitlements will be calculated and disbursed.

Read another sales article from the REIQ: Managing the new entry restrictions, open homes and private inspections: Residential sales.

Or browse our suite of articles.