Court of Appeal supports High Court decision to interfere with employer’s wide discretion over commission payments


Author: Mike Tremeer


How should employers exercise their discretion over discretionary commission or bonus payments?

In the recent case of Hills v Niksun Inc., the Court of Appeal explained that even where contractual documents state that an employer retains absolute discretion over the amount of any commission paid, this is subject to the terms of any additional documents or established practice. It supported the High Court decision to interfere with an employer’s discretion in appropriate circumstances.

In summary, the effects of the decision are:

  • the Court of Appeal confirmed that employers can retain a wide discretion over the amount of commission (or bonuses) that they pay out to their employees;
  • courts will only step in to remedy discretionary decisions if they are perverse or irrational;
  • in deciding whether a decision is perverse or irrational, it is appropriate for a court to consider all documentation relating to the payments e.g. compensation letters or commission plans to see if an employer has in any way limited its absolute discretion;
  • employers should consider carefully what is written in any documentation related to commission (or bonuses) to make sure any discretion they wish to have has not been removed or varied; and
  • if employers have narrowed the range of their discretion by setting out factors they will consider when exercising their discretion, and they do not take these factors into account when making their decision, this could lead to a finding that their decision is perverse or irrational i.e. akin to being outside the range of reasonable responses open to an employer in those circumstances.

Facts

Mr Hills was employed by Niksun in the UK as a Regional Sales Manager. There were various documents relating to sales commission, which stated as follows:

  • “participation [in the commission] plan will be on such terms, and subject to such events, as [Niksun] may from time to time determine at its absolute discretion” (contract of employment);
  • “all disputes in compensation and commissions, and any interpretations of this letter or Niksun’s policies, will be solely decided by Niksun management” (compensation letter);
  • “Niksun reserves the right to determine what level of executive compensation, if any, is fair and reasonable under the circumstances, and is in the best interest of Niksun” (compensation plan); and
  • where a sale involved several regions, commission would be split taking into account the point of influence, point of sale and point of installation (commission plan).

The point of influence was defined in the commission plan as the country where major account control was based – including where the relevant contract was negotiated and managed.

In 2011 Mr Hills sold a software contract to Credit Suisse London, although the US also had some involvement in the negotiation process.

Mr Hills’ manager in the UK was told by a Mr Salgame in the US that the UK would be “looked after” in respect of commission and would get the “lion’s share” (which he took to mean 66%).

Niksun subsequently determined that the US was the point of influence for the sale. As a result the UK and in turn Mr Hills was awarded only 48% of the commission available for the deal.

High Court

Mr Hills argued that the decision to award only 48% of the commission to the UK was a breach of contract given the content of the commission documents, and that he should have been awarded 100% of the available commission.

Niksun countered that the wording of the commission documents meant that they had retained a wide discretion regarding commission, and they had exercised that discretion reasonably.

The High Court disagreed with Niksun. On the facts, it found that the point of influence was the UK, and that the UK should therefore have been awarded 66% of the commission as envisaged by the discussion with Mr Hills’ manager. The High Court found that Niksun was, in accordance with the wording in the commission plan, obliged to have regard as to what was “fair and reasonable under the circumstances”. Awarding only 48% to the UK was outside the bracket of what was fair and reasonable.

Court of Appeal

Niksun appealed on the basis that the High Court had failed to take into account the wide discretion retained in the commission paperwork and that the court had essentially substituted its own view of what it considered fair and reasonable for Niksun’s.

The Court of Appeal dismissed this argument. It found that Mr Hills had demonstrated that there were sufficient grounds to suggest that Niksun’s decision was not reasonable. As a result, the burden shifted to Niksun to demonstrate that the decision was reasonable. They had failed to do this. In particular, Mr Salgame, whose decision it was to award the UK only 48% of the commission, had not appeared as a witness to explain his decision.

The Court of Appeal decided that it could not assume that the decision had been taken rationally, and so upheld the High Court’s decision to increase the UK’s commission to 66%. Although the commission documents did retain a large amount of discretion for Niksun, they also set out a detailed process for the award of commission which Niksun was obliged to follow.


Fladgate comments:

Disputes concerning bonus, commission and other variable payments are common, and that is likely to remain the case.

Courts have been reluctant to interfere with an employer’s discretion unless a decision could be shown to be “perverse” or “irrational”. This is a heavy burden of proof for employees.

In this case the employer’s documentation provided for it to consider particular factors when making decisions about commission, including requiring it to decide what was “fair and reasonable in the circumstances”, so it had effectively introduced some limits to its wide discretion. However, it was significant that Mr Salgame, the decision maker for Niksun, did not give evidence to the High Court and in the absence of an explanation as to how he had exercised his discretion it was possible for the court to find in favour of the employee. It is possible that the outcome would have been different if Mr Salgame had given evidence.

Nevertheless, this case shows the importance of all relevant documentation being consistent, the decision maker being aware of the factors they must consider when exercising their discretion and, ideally, making a note or other written record that they have done so.


Mike Tremeer, Senior Associate, Fladgate LLP (mtremeer@fladgate.com)

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