What Are Employers' Obligations in Relation to Discretionary Commission?
An Employment Tribunal has found that an employer's decision not to pay an employee the full amount of his commission when he returned from furlough was irrational.
Therefore, the employer was liable to pay the employee outstanding commission on deals that had completed whilst he was on furlough.
In the recent case of Sharma v Lily Communications Ltd, the employment tribunal considered claims for outstanding commission payments brought by a former employee (Mr Sharma) who, following a period of furlough from March to August 2020, was made redundant by his employer (Lily Communications Ltd) (LCL) in October 2020.
Mr Sharma was employed by LCL as a Business Development Manager. His payment package included discretionary commission, which could give rise to commission of 15% on sales. Despite Mr Sharma's impression that the commission was guaranteed, the tribunal concluded that Mr Sharma's contract was clear that commission was a discretionary benefit which was not guaranteed. Nevertheless, whilst commission was not a contractual entitlement and LCL had discretion to decide whether and how to pay it, the tribunal (applying widely accepted contractual principles) found that LCL did have a contractual obligation to act rationally and in good faith when it chose to exercise its discretion to make a commission payment to Mr Sharma.
Commission Payments During COVID-19
As a result of the COVID-19 pandemic, LCL placed Mr Sharma on furlough between March and August 2020. LCL also decided that commission for furloughed employees would be deferred, so staff would not receive any commission payments whilst on furlough. They indicated that furloughed employees would receive the payments at a later date.
Mr Sharma returned to work in August 2020 and he did receive a commission payment from LCL. However, this did not correspond with the total level of deferred commission he had expected to receive (and had been assured he would receive by the managing director and his line manager).
Mr Sharma was made redundant in October 2020 with immediate effect and received payment in lieu of notice, but did not receive any further commission. He claimed that commission payments were still outstanding and therefore brought claims in the employment tribunal.
What Was the Employment Tribunal Decision?
With regard to LCL's decision to defer commission payments for furloughed staff, the tribunal considered that this was rational and in good faith, stating that the uncertainty arising from the pandemic perhaps being a “paradigm example” of a situation in which an employer would want to exercise its discretion regarding commission payments in a different way.
However, in respect of Mr Sharma's commission payments, the employment tribunal considered that LCL had not acted rationally and/or in good faith. It was noted that payment of commission was not contingent on Mr Sharma meeting targets. This meant that to the extent that LCL had withheld commission payments in months where Mr Sharma had met his targets, the decision to withhold commission was not rational, nor was it rational to withhold commission on the basis of Mr Sharma not having met targets in other months.
The tribunal therefore concluded that the employer was in breach of its contractual obligation to exercise its discretion with respect to the payment of commission rationally and in good faith. As such the employer was ordered to pay Mr Sharma the outstanding commission sums on deals that had completed whilst he was on furlough.
Takeaway Points for Employers
Whilst this case is an employment tribunal decision and therefore, not binding on other tribunals, it does serve as an important reminder of widely accepted contractual principles. Employers should be aware that, even where there is not a contractual obligation to make commission payments to staff, there does remain an implied contractual obligation to act rationally and in good faith when exercising any discretion they may have in respect of commission payments.
We anticipate that for many employers, commission payments will have been affected by the pandemic and as staff return from furlough employers will need to revisit the issue of commission. Employers should:
- ensure decisions are well documented for their audit trail
- take care when exercising discretion and considering how or, if payments will be made.
It is important to remember that even where a commission scheme is discretionary, there is still a contractual obligation to exercise that discretion rationally and in good faith.