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COMMISSION AND BONUS SCHEMES
Commission and bonus payment disputes arise on a regular
basis between employers and employees. Employers often refuse to pay outstanding
commission or bonus when an employee leaves to go and work for someone else
but in extreme cases some employers refuse to pay whilst a person remains in
employment, citing a variety of often plausible reasons for their failure to
do so.
Contractual Terms
Contrary to popular belief every employee has a contract
of employment. The contract may be in writing such as an appointment letter
or a staff handbook. Alternatively terms may have been agreed orally, or, the
contract may have come into existence by implication through a course of dealing
or “custom and practice”. In the same way, if an employee receives
commission there will be rules which govern the manner and method in which
that commission is paid. These rules may have been recorded in writing, or
agreed orally, or have arisen through past practice.
When drafting contracts of employment for employers solicitors
are often asked to ensure that any entitlement to commission under the contract
is expressed to be discretionary in nature. This “discretion” often
purports to allow employers to vary or alter the terms of a commission scheme
and even to cease or withdraw payments without notice. The clause inserted
in the contract is usually similar to the following:
“The Company reserves in its absolute discretion the
right to terminate or amend the commission arrangements applicable to you without
notice at any time or to exclude you from participation in any commission arrangements
without giving any reason.”
Disgruntled employees and ex-employees are then referred
to this clause by their employers when they suddenly find commission or bonus
payments which they were expecting deducted from their salary or notice pay.
Often both employers and employees believe that this is sufficient to effectively
draw and end to the matter.
Kent Management Services Ltd v Butterfield, 1992
Mr Butterfield decided to take the matter further. Mr Butterfield
was paid salary and commission/bonus. The commission and bonus scheme contained
the following clause:
‘ Whereas the intention of the commission and bonus
schemes is to stimulate motivation and provide a fair return for additional
effort, there are circumstances, however unlikely, when payment may be either
not justified or not possible. An extreme example would be bankruptcy! Consequently,
for legal purposes, the schemes will be defined as discretionary and ex gratia
and will not constitute a contractual arrangement with the employees concerned.’
When Mr Butterfield’s employment came to an end he
was due £2,494 in commission but he received only £1,227. His employers
sought to rely on the discretionary nature of the commission scheme but when
Mr Butterfield went to Tribunal the Judge at the Employment Appeals Tribunal
found that the balance of the commission due to Mr Butterfield was payable.
In the Judge’s own words:
“ It was within the reasonable contemplation of both
parties that in ordinary circumstances, and there is no suggestion on the documentation
nor in front of the industrial tribunal that there were any special circumstances
for non-payment, it was payable.”
As for the agreement itself the Judge had this to say:
‘ This must be a form of agreement or clause which
is to be found in many situations in employment. If reasonable notice is given,
clearly these schemes can be varied and altered and might be abolished, but
whilst the schemes are in being, the anticipation will be that in normal circumstances
commission will be paid on work which has been carried out and on which the
calculation is based; the anticipation of both parties is clearly that it will
be payable.”
Constructive Dismissal.
In Mr Butterfield’s case the reference to the discretionary
commission scheme was contained in the contract of employment. However, there
is no obvious reason why the principle should not extend to any commission
or bonus payments provided they are paid with regularity (as a matter of factual
history) and regardless as to whether or not specific mention is made in the
contract itself. On this basis the principle could be extended to include practices
such as the payment of an annual Christmas bonus.
An employer’s failure to pay commission or bonus in
these circumstances is likely therefore to constitute a breach of contract
and will probably permit an employee to resign and claim constructive dismissal.
Alternatively an employee could remain in employment and simply bring a claim
for Unlawful Deduction of Wages.
Notice Periods
Of course the most usual circumstances where issues arise
over the payment of commission or bonus are following an employee’s resignation
from employment. Employer’s often prefer to release employees immediately
once they resign and pay them off or, more accurately, pay in lieu of the notice
period. If there is a contractual right to pay in lieu then the employer is
perfectly entitled to act in this way and there is little prospect of an employee
recovering commission which he or she would have earned had they been allowed
to work out their notice period.
But if there is no contractual right to make a payment in
lieu, and the employee’s salary includes a large commission element,
the employee may be able to argue that he or she has the right to work out
their notice period and thus the opportunity to earn, and be paid, commission
during the notice period.
Conclusion
What can employers and employees take away from all this?
Well simply this: with bonus and commission arrangements, if employees have
earned it and are expecting it, then generally they are entitled to it.
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