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.
The Interactive
Law Group