Rewarding employees by way of commission and bonuses is a very useful tool for an employer to motivate its workforce. There are many different methods that an employer can use to calculate commissions and bonuses, from the very simple to the very complicated. Such schemes can be contractual or discretionary in nature, or there may be some crossover between contractual and discretionary provisions.
Where an employer provides a scheme which is wholly discretionary, an employee will struggle to show they have any right to the commission or bonus. However, an employer should be aware that a discretionary scheme can start to become contractual by custom and practice.
Where commission and bonus payments play a central role in remunerating and motivating staff, it may be beneficial for both the businesses and its staff to provide contractual schemes which give clear guidelines as to when bonuses and commissions are payable. When an employer draws up detailed contractual commission and bonus schemes, it is quite usual for an employer to reserve the right to withhold payment in certain circumstances, for example, when an employee is subject to disciplinary action. However, a well advised employer may also want to reserve discretion about when payments may be withheld in circumstances which may not have been contemplated. How far can an employer exercise its discretion to withhold contractual payments?
This point has recently been discussed in GX Networks Limited v Greenland. The employer provided a contractual commission scheme which depended on the attainment of certain sales targets. The employer retained a right to cap employee’s commission if required, but stated that it would only invoke such a right “by exception only”. The employee in this case far exceeded her targets which resulted in a commission payable of £163,503. The employer sought to limit her payment to £37,980 stating that her over performance was an ‘exception’ which allowed them to invoke their discretionary right to cap commission.
The Court of Appeal disagreed and found that the full amount of commission was payable and that over performance was not an exception which allowed the employer to exercise its discretion. If the employer wanted to limit the commission payable “by exception only”, the employer would need to show exceptional circumstances, such as an act of gross misconduct or where the company may go bust if such payment was made. The very fact that the employee had earned an amount more than had been anticipated by the employer when it drew up the scheme was not exceptional.
The lesson to be learned from this case is that the devil is in the detail. The clause on which the employer sought to rely provided an overall discretion, which if invoked would undermine the whole essence of the commission scheme. An employer should not rely on a discretionary right to withhold commission payments and a carefully drafted commission or bonus scheme should clearly outline circumstances when the employer will exercise its right to withhold or cap payments.
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])