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Employment Law

Legal guidance - compliance - software

21 MAR 2016

When is an employer's discretion to award commission limited?

When is an employer's discretion to award commission limited?
Mark Stevens
Associate, Veale Wasbrough Vizards

The Court of Appeal has found that the High Court was entitled to increase an employee's commission level, where the employer could not provide evidence of the decision making process behind the way that it had allocated commission.

The facts

In Hills v Niksun Inc, Mr Hills was employed by Niksun Inc (Niksun) as a regional sales manager in the UK. Part of Mr Hills' remuneration consisted of commission. His contract of employment included the wording:

'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 ...'

A commission plan went on to describe the factors Niksun would take into account when splitting commission between its offices worldwide.

Following a deal that involved work done by various Niksun offices across the world, including Mr Hills in the UK, the UK office was allocated 48% commission on the deal. Mr Hills disputed this decision and argued that the commission allocated to the UK should have been higher. The High Court agreed with him and found that 66% of the commission should have been allocated to the UK.

Niksun appealed against this decision, arguing that the High Court judge had been wrong to interfere with Niksun's discretion when making decisions about the allocation of commission.

The Court of Appeal (CA) rejected Niksun's appeal. It held that the burden of proving that insufficient commission had been paid was initially on Mr Hills. Once he had demonstrated that there were grounds for thinking that Niksun's decision was not reasonable, the burden shifted to Niksun to show that the decision made had been  unreasonable.

The CA noted that the High Court had found that Mr Hills had been told that the UK office would be 'looked after' and it would receive the 'lion's share' of commission. Moreover, Niksun had not provided any evidence as to how it had reached its decision to allocate commission in this way. The CA found that this was problematic, as the decision might have been taken rationally by Niksun, or it might not.

Additionally, the fact that the contract and other documents referred to Niksun's discretion, did not mean that its discretion was broad and untrammelled. In fact, the discretion had to be exercised in accordance with the detailed terms of Niksun's commission plan, and there was no evidence that it had been.

Best practice

Although the threshold to be reached by the courts before they interfere with employers' commercial decisions, for example awarding commission, is very high, this does not mean that employers have unfettered discretion when making such decisions.

Broad statements in contractual documents about discretion will be treated with caution by the courts, and employers will be expected to provide evidence of how they have reached their decision in situations such as these.
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