DAVID ROYDEN - EMPLOYMENT SOLICITOR
UK EMPLOYMENT LAW

David Royden is a Partner with Laytons Solicitors and Head of Employment Law, Manchester, UK

Laytons Solicitors is a national law practice specialising in all aspects of Company and Commercial Law

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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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Employment Law Procedures - view section

Tribunal Claims - view section

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