Where employers offer their employees a bonus or commission scheme, they frequently state in the contract of employment that any payment is entirely at the employer’s discretion.
Obviously, on the face of it, this gives employers an enormous amount of freedom in deciding whether to pay bonuses or commission, and if so, how much. There have always been some constraints on an employer’s discretion (for example under discrimination legislation it would be unlawful to withhold a payment because of a person’s ethnicity) but in the recent case of Hills v Niksun Inc (2016) the Court of Appeal had to decide how much discretion an employer had in circumstances where there was no discrimination.
Mr Hills was employed by Niksun Inc, an American corporation, as its UK sales manager. After a sale of security software, he was promised that he would be “looked after” in respect of commission for the deal and receive the “lion’s share”. However, in the event, Niksun Inc allocated only 48% of the available commission to the UK office. Mr Hills then resigned and brought a claim in the High Court for breach of contract, alleging that Niksun Inc had failed to exercise its discretion to allocate commission rationally or reasonably.
The High Court considered the terms of Mr Hills’ contract of employment, the sales compensation letter which had been sent to him and the company’s Sales Compensation Plan. This latter document stated that the level of commission to be paid should be “fair and reasonable”. The court also heard evidence from Mr Hills’ manager who told the Court that he understood “looked after” to mean two-thirds of the available commission. In these circumstances, the Court held that it was not lawful for the UK branch to be awarded less than two-thirds because that was outside the bracket of what was “fair and reasonable under the circumstances”.
Niksun Inc appealed to the Court of Appeal, arguing that the High Court had no right to interfere with its exercise of its discretion. The Court of Appeal dismissed the appeal and upheld the High Court’s decision. They found that once Mr Hills had shown that there were grounds for showing that he reasonably believed Niksun Inc’s exercise of their discretion was unreasonable, the burden shifted to the company to explain why they reached the decision they did. The company did not produce evidence to show this, and therefore the Court of Appeal held that the High Court was entitled to reach the decision it did.
This case is a useful reminder that where an employer has to exercise discretion, it has to do so fairly and in accordance with any contractual documentation. This particular case was very fact specific on the wording of the Sales Compensation Plan, but even in the absence of a similar provision, it is quite likely that the courts would have reached the same conclusion.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected]).