Commission schemes: Contractual or discretionary?
Commission schemes are frameworks used by employers to incentivise employees (typically sales staff). There are many different types of commission scheme; by reference to volume of sales, value of sales, leads generated, renewals and retentions. There may be a minimum threshold and different commission multipliers may apply above and below certain figures.
Sometimes, especially when commissioned employees depart from a company, there can be a dispute as to whether or not they are entitled to commission payments. In this article, we shall look at the state of the law in this area.
The key legal question is whether a commission scheme is contractual or discretionary. If the commission scheme is contractual, then it is binding on the employer. If it is discretionary then it isn’t binding and therefore the employee isn’t entitled to commission payments.
Before we get into the legal ins and outs, it is important to say that a contract can be written, oral or implied by conduct (eg by a history of commission payments).
Is there a written scheme
The easiest way of identifying whether or not a commission scheme is contractual is by looking at the contract of employment. Generally commission clauses will come in two types:
- Commission clause giving the employer partial discretion – A clause giving the contractual right to participate in a commission scheme, but the terms of the scheme are at the employer’s discretion; or
- Commission clause giving no discretion – A clause giving the contractual right to participate in a scheme, but also making the terms of the scheme contractual.
Both the above commission scheme clauses are binding, but the difference is that the first doesn’t allow an employee to query the terms of the scheme (the applicable terms will be the terms of the scheme as of the employee’s termination/notice of termination); the second does.
Implied by conduct
In the rare event that a commission scheme is ‘purely’ discretionary; or if the employment contract is unclear as to whether a commission scheme is contractual, the tribunal would look into all the relevant facts. This includes looking at the conduct of the employer, in particular the custom and practice (e.g. whether or not commission payments have been paid regularly or not). If a tribunal was to find such a scheme was contractual, they would look into all the relevant facts to calculate how much the employee is entitled to in commission.
Employers usually create written schemes to look as though they give definite benefits but use discretionary language to give themselves wiggle room not to pay if they choose. The Courts have said that this wiggle-room mustn’t be abused in an egregious way; any decisions to exercise a discretion don’t have to be reasonable but they must be exercised rationally. That means a decision to pay nothing would be unlikely to fly, as would a decision made without any thought-process or a decision based on personal grudge or favouritism. But a decision to pay something, even a trivial amount, is not easy to challenge.
To avoid disputes, we advise employers to make clear in the contract of employment whether a commission scheme is contractual or not. If it isn’t contractual, then employers should be careful not to operate the scheme in a way where it can be ‘implied by conduct’ that the scheme is contractual (e.g. by making regular commission payments).
By Zahid Reza
Image used under CC courtesy of ILO in Asia and the Pacific