In Hills v Niksun the Court of Appeal has upheld the decision of the High Court to take the unusual step of interfering with an employer’s assessment of the commission entitlement of one of its employees.

Facts

Mr Hills was employed by Niksun as a regional sales manager. A large part of his remuneration consisted of commission. The rules of the commission scheme were set out in both his contract of employment and a number of ancillary documents.

The dispute centred around a significant deal negotiated by Mr Hills with Credit Suisse London in respect of the sale of Niksun’s software for the Asian and Pacific market.

The US office of Niksun had some involvement in these negotiations and Niksun determined that as a result the US was the ‘point of influence’ for the sale under the commission scheme. This was defined under the scheme as the location where major account control resided, including where the contract was negotiated and managed.

The upshot of Niksun’s determination was that only 48% of the commission for the deal was allocated to the UK office and, in turn, Mr Hills. This cost Mr Hills some £6,701 in commission. 

Mr Hills brought a claim for breach of contract, alleging that the commission should have been allocated 100% to the UK office and that, accordingly, he had been underpaid commission.

The High Court decided that the UK was in fact the point of influence and that, accordingly, a 48% allocation of commission was not fair and reasonable. It substituted a figure of two-thirds, having regard to the evidence it heard. The court concluded that “in a world where split commissions were common” an award of less than two-thirds was “quite simply outside the bracket of what [was] fair and reasonable under the circumstances”.

Niksun appealed to the Court of Appeal but the appeal was dismissed.

In particular, the Court of Appeal rejected the arguments that the wording of the scheme (which attempted to reserve an extremely wide discretion to Niksun as to how commission would be calculated) meant that its discretion was broad and unfettered. The plan set out a detailed process for the award of commission which Niksun was obliged to follow. Any discretion had to be exercised in accordance with the detailed terms of the plan.

Comment

It would be wrong to take from this case that employers now have the burden of proving that any decisions rooted in discretion are reasonable, or that they must adduce evidence of their decision-making process in order to avoid a finding of irrationality. However, it does set a precedent for arguments of this sort to be made in similar cases. The test remains that any exercise of discretion in such cases will only be overturned if it is shown to be perverse or irrational.

The case is, however, a useful reminder that broad statements of discretion in contractual documentation for bonus or commission schemes will be of limited influence and will be treated with caution by the courts.

Hills v Niksun Inc [2016] EWCA Civ 115, 1 March 2016 (Bailii)