Commissions and bonuses are two accepted mechanisms for compensating employees. Both are perceived by employees as additions to their salary, but legally they are entirely different components concerning their impact on the calculation of the employee's social benefits.
What is a commission?
Commission is a payment for performing a specific job – usually a fixed percentage of a sale, profit, or income that the employee actually generated (e.g., a certain percentage of a sale made by a sales agent). Commission is considered As an integral part of salary And it is paid regularly according to the worker's output. Regulation 9 toSeverance Pay Regulations (Calculation of Severance Pay and Resignation Deemed Dismissal), 5724-1964, This reinforces the position and states that when an employee's salary is paid, in whole or in part, for the performance of specific work, based on a share of revenue or the quantity of output, the last salary for the purpose of calculating compensation will be the average salary of the last 12 months. In other words, commissions paid for ongoing work will be included in the compensation calculation, taking into account the average actual income.
In the ruling cc (local) 300048/98 Ovadiah Mark N. Hestor Ltd. It has been determined that commissions are a legitimate component of salary and therefore must be included in the calculation of severance pay, social benefits, overtime hours, and vacation day redemption. Israeli case law consistently and clearly establishes that commissions paid to an employee on a regular basis Even if they are not permanent, are considered part of the regular wage component.
What is a bonus?
A bonus, on the other hand, is a one-time payment (usually) and is different in nature. It is given as recognition for an achievement, serves as an incentive for work achievements, or is given at the employer's discretion. Regulation 1 of the Severance Pay Regulations lists a closed list of components included in salary for the purpose of severance pay: base salary, seniority increment, cost of living allowance, family allowance, departmental allowance, and professional allowance. Components not on this list – such as a one-time bonus – are not taken into account when calculating severance pay, as it is considered As a salary supplement.
In the ruling CA (National) 300434/97 The Beersheba Company for Education and Culture Enterprises – Nina Topfer It was determined that the test to decide whether an addition is part of the salary (i.e., commission) for the calculation of severance pay, or alternatively, whether it is a bonus, is to examine whether that addition is conditional, such that if the condition is not met or changes, the employee is not entitled to it.
Summary
The distinction between 'commission' and 'bonus' is critical for employers. Commissions must be included in the calculation of all wage-derived benefits. In contrast, a bonus is generally not considered part of wages.
Therefore, it's important to define Precisely In every employment agreement, clearly state the compensation mechanisms and clarify, in advance, whether the compensation constitutes a commission or a bonus, the conditions for receiving it, and whether it is a permanent entitlement or a one-time benefit. Proper wording and clear separation will prevent legal disputes, ensure certainty for both parties, and can save the employer significant sums of money and reduce their exposure to expensive and protracted legal proceedings.
Our firm specializes in providing legal counsel to companies and businesses, drafting agreements, and defining compensation mechanisms in accordance with the law and case precedents, in order to ensure that the company manages its risks correctly and in a controlled manner.
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