The Employment Rights Act 2025 provides that any agreement preventing a worker from making...
The Limit of an Employer's Discretion in Bonus and Commission Schemes
Companies do not have an unfettered discretion when deciding how much commission and bonus an employee should receive.
In Hills v Niksun Inc Mr Hills was employed as Niksun’s regional sales manager in the UK for just 9 months during which time he was eligible to participate in a commission scheme. His employment contract, the commission plan and scheme rules, referred to the discretionary nature of the plan and that Niksun would decide itself what compensation, if any, was reasonable and fair in the circumstances and in its best interests. Commission was split between regions having regard the “point of influence” which was the location where the major control resided, point of sale and point of installation.
In 2011 Mr Hills negotiated a deal with Credit Suisse London. The US team had some involvement in the negotiations and Niksun subsequently decided the US was the point of influence and accordingly allocated 48% of the total commission payable to the UK office, and therefore Mr Hills.
Mr Hills disagreed and brought a breach of contract claim against Niksun, claiming Niksun ought to have allocated 100% of the commission to the UK.
Although the High Court found Mr Hills to be an unreliable witness, he was successful and the High Court decided Niksun ought to have allocated two thirds of the available commission to the UK office (and therefore Mr Hills) rather than 48%. The High Court substituted two thirds in place of 48% as a result.
In making this decision, the High Court decided the UK was the point of influence and so it was not reasonable or fair to allocate only 48% commission to that office. In addition, Niksun ought to have considered what was fair and reasonable in the circumstances, as per its own documentation, which would have meant taking into account the way the deal had been concluded, the company’s own guidelines on split commissions, and the assurances given by its US manager to the UK manager that the UK would be “looked after” which was interpreted as meaning the UK would get two thirds of the available commission.
Niksun appealed this decision on the basis the court was wrong to find that a higher commission was owed. They argued that the business had a broad discretion in deciding the level of commission, that it was for Niksun to decide where the point of influence was and that the High Court had failed to take into account the best interests of the company.
The Court of Appeal dismissed the appeal. It decided Niksun had not produced evidence to show its decision was reasonable and that it did not have an unlimited discretion because the commission documents set out a detailed and precise matrix for earning commission. Furthermore, although Niksun’s interests were relevant to the decision making process, they did not override the fact the UK had been promised it would get the “lion’s share” of the commission available.
Most employment contracts state that bonus or commission schemes are discretionary but employers need to ensure that the actual plans do so also and it would be prudent to avoid a precise matrix for earning commission/bonuses. Employers should take into account all relevant factors including verbal promises made to employees when deciding the value of commission or bonus, and to keep a paper trail of that decision making process.