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What's New? > Disputes between Employers and Employees over commission and bonus payments

Disputes between Employers and Employees over commission and bonus payments

Published: 3rd September 2010

Commission and bonus payment disputes continue to arise regularly between employers and employees.

In particular, city bankers' bonuses have been in the spotlight over recent months following the one-off super tax of 50% on bankers bonuses which were in excess of £25,000, paid between December 2009 and April 2010.  This tax has been very expensive for banks, some reporting tax bills in excess of £350 million.

Not many bonuses or commissions are paid at the same levels of those in the city, however, in the current financial climate these payments are continuing to cause disputes between employers and employees where employers are seeking to withhold or reduce payments, or not make them at all in a bid to make financial savings to carry their businesses through the recession. However, the recession is not always the main reason for reduced or non-payment of commission or bonus payments.

When a dispute over a bonus or commission payment arises, the first point of reference is the employee's contract of employment.  Usually the contract of employment will state that the payment of a bonus or commission is entirely at the employer's discretion.  When a dispute arises, the employee will be referred to this clause with both parties often believing that this draws a line under the dispute.  This is not always the case.

If there is nothing in writing regarding the payment of a bonus or commission, the terms may have been agreed orally.  Alternatively, the agreement in respect of these payments could come into existence through a course of dealing or by custom and practice and therefore it could be an implied term of the contract, giving rise to a contractual entitlement to these payments.

The case of Kent Management Services Ltd v Butterfield 1992 dealt with an employee's claim for unpaid commission.   When Mr Butterfield's employment came to an end, he received only £1,227 of a £2,494 bonus which he was entitled to.  The contract of employment stated that commission and bonus payments were discretionary and ex gratia.

The Judge decided that it was in the reasonable contemplation of both parties that the commission was payable, and there was no suggestion on the documentation, nor in front of the tribunal that there were any special circumstances for non payment.  As such, the full amount was payable.

Whilst discretionary schemes can be varied and altered or even abolished, whilst they are in existence, the general rule is that if the commission or bonus is earned and expected by the employee, it must be paid.

Therefore an employer's failure to pay commission or bonus earned in circumstances such as in the case of Butterfield could result in a breach of contract by the employer, giving rise to a claim for constructive dismissal by the employee.  However, to bring such claim, the employee must resign from his or her employment.  Employees must seek legal advice before resigning to ensure that they do have a potential claim.

The recent case of Khatri v Cooperatieve Centrale Raiffeisen-Boerenleenbank BA 2010 has highlighted the principles established in Butterfield.

In the case of Khatri the bonus scheme set out a formula to calculate Mr Khatri’s 2008 bonus.  The contract reserved the right to change the formula-linked bonus at any time.  The Court of Appeal held that the wording simply allowed the employer to use a different formula in future years, not to change the formula set for 2008.  A further issue was that the employer sought to change Mr Khatri's terms and conditions, including removing the bonus.  Mr Khatri did not sign the contract and the employer argued that his continued work amounted to acceptance of the new contract.  The Court of Appeal held that because the change had no immediate impact, save for a minor "trivial" change, there was nothing to suggest that his continued work amounted to acceptance.  Mr Khatri's claim succeeded.

Avoiding Disputes

Employers and Employees should remind themselves of the following:

• Document all discussions, including those held during the interview and recruitment phase
• Clarify the terms of the payments and put these in writing in clear, unambiguous language
• Clarify how payments will be calculated, define terms such as "profit" and "targets"
• Clarify any limits or caps on payments and how and when these will be paid
• Clarify any exceptional circumstances when payment may be withheld, or will not be made ie. if the employee is dismissed for gross misconduct

Employers and employees seeking legal advice on the above topic, or any other employment related topic, are invited to contact Mrs Kim Faivelowitz, a Legal Executive in the Civil Litigation and Employment Department of Ward Gethin, on 01553 660033.

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.