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Commission / bonuses: Exercising discretion

Published On: 15 April 2016

In this case, the Court of Appeal considered whether the High Court was entitled to interfere with the employer's assessment of an employee's entitlement to commission.

The facts

Mr Hills was employed by Niksun in the UK. Part of his remuneration consisted of commission, which was referred to in his contract of employment, a sales compensation letter and a sales compensation plan as follows:

  • "You may from time to time be eligible to participate in such commission plan(s), if any, as [Niksun] may in its absolute discretion determine. Participation 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 in 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" (commission plan);

The commission plan went on to specify that commission would be split between regions, having regard to point of influence, point of sale and point of installation. Point of influence (a factor which was significant in this case), was defined as the location where major account control resided, including where the contract was negotiated and managed.

Mr Hills negotiated a deal in which the US also had some involvement. Niksun determined that the US was the point of influence and, on that basis, decided that 48% of the commission should be allocated to the UK office and, in turn, Mr Hills.

Mr Hills brought a claim for breach of contract, alleging that the commission should have been allocated 100% to the UK office and that, accordingly, he was owed £6,701 in underpaid commission. 

The High Court decided that the UK was the point of influence and that, accordingly, a 48% allocation of commission was not fair and reasonable. It substituted a figure of two thirds, having regard to a conversation where Mr Hills' manager was told by the decision maker in the US that the UK would be "looked after", and it would get the "lion's share" of commission, which he understood to be two thirds of the commission. The court construed the contractual documentation as requiring the decision-maker to have regard to what was "fair and reasonable in the circumstances" (as per the compensation plan). The decision-maker should have had regard to the guidelines on split commissions, the facts as known to him about the way in which the deal was concluded, and the assurance given to Mr Hills' manager that the UK would be "looked after" (later referred to as three factors).

Niksun appealed to the Court of Appeal, which dismissed the appeal.

The Court of Appeal said that the High Court had been entitled to interfere in the level of commission. In particular, it had been right to decide that the point of influence was the UK, that 48% was not a reasonable figure for the purposes of calculating how commission should be split between regions. A figure of two thirds, based on the manager's evidence, was reasonable.

The Court considered that once Mr Hills had demonstrated there were grounds for concluding that Niksun's decision was not reasonable, the evidential burden shifted to Niksun to show its decision was reasonable. Niksun had failed to demonstrate this, not having called for evidence from its decision-maker, or given other evidence about the way the decision had been taken. In the Court's view, this was problematic for Niksun and the Court could not assume that its decision had been taken rationally. The judge was justified in deciding the point of influence himself. Alternatively, he was entitled to find from the circumstances and based on the language of the contractual documentation, that the point of influence was the UK.

The Court also held that the repeated references in the contractual documentation to Niksun's discretion did not mean that its discretion was broad and untrammelled. The plan set out a detailed process for the award of commission, which Niksun was obliged to follow. The discretion had to be exercised in accordance with the detailed terms of the plan. 

What does this mean for employers?

Following on from Braganza, a 2015 case about the exercise of an employer's discretion, this case may show an increased willingness on the part of the courts to scrutinise how an employer has exercised its discretion.

The judgment suggests that, once an employee has put forward an arguable case that the employer's exercise of discretion is irrational, the employer needs to show that it acted reasonably. Here, Niksun did not put forward sufficient evidence of this, and this was its undoing. Employers should therefore be aware that, if challenged about a bonus or commission decision, they may have to be able to articulate and give evidence of why a particular decision has been made. This can be difficult where the employer's bonus/commission procedure does not include keeping a record of the reasoning behind decisions. 

In this case, the wording around the exercise of discretion was particularly important. While Niksun's documentation made frequent references to discretion, it also set out details of how the commission should be calculated. The employer's discretion was therefore not "broad and untrammelled", but was constrained by the language of the documents with their precise matrix for earning commission. Employers should, therefore, be sure that decision makers are aware of wording which might circumscribe a broad exercise of discretion. 

Hills v Niksun Inc [2016] EWCA Civ 115, 1 March 2016