Commission impossible?

Commission or bonus schemes are common in many industries, allowing employees to see their hard work reap specific rewards. It’s almost as common for employers to try to limit their obligations to pay commission or a bonus to a person when their employment has terminated when payment is due. But a recent Employment Appeal Tribunal decision in Peninsula Business Services Limited v Sweeney provides valuable lessons for employers on how to ensure that clauses in commission or bonus schemes allowing the withholding of payments in these circumstances are valid and enforceable.

The facts: On 19 October 1998, Peninsula wrote to Mr Sweeney offering him a job as a sales executive. The letter set out basic terms and conditions of employment and stated that the offer of employment was conditional upon Sweeney signing Peninsula’s standard contractual terms, which included the rules of its commission scheme. Although those documents were not enclosed with that letter, Peninsula said that Sweeney could inspect these documents at their business address by arrangement, if he so wished. Sweeney wrote back to accept the offer of employment and signed the rules of the commission scheme about a week after his employment started.

The rules of Peninsula’s commission scheme stated that commission was payable at the end of the calendar month following payment to Peninsula by its customer of 25% of their total fee. Section B of the rules, headed Employees Leaving the Company, stated that if the contract of employment was terminated either by Peninsula through dismissal or by the employee through resignation, special rules would apply.
Commission payments would only be payable if the sales executive was still in employment at the end of the calendar month when the commission payment would normally become payable (except where the company had dismissed the sales executive as a result of redundancy or retirement).

Section B then confirmed, in a separate paragraph, that it was an express provision of the contract that an employee had no claim to any commission payments that would otherwise have been payable if they were not in employment on the date when they would normally have been paid. Finally, Section B emphasised that as the non-payment of commission and bonuses were contractual terms, these amounts were not “properly payable” under the contract and, therefore, did not amount to unlawful deduction from wages for the purposes of the Employment Rights Act 1996.

Sweeney resigned in July 2001 and claimed he was owed around £21,000 in commission. He issued proceedings in the employment tribunal claiming damages for breach of contract and unlawful deduction from wages.

The employment tribunal found in Sweeney’s favour. It found the commission rules were not incorporated into his contract of employment. As the provisions of Section B were “unduly onerous”, Peninsula could only rely on them if it could show that they had fairly brought the terms of Section B to Sweeney’s attention, which they could not.

The tribunal further decided that Section B was void as being an unlawful restraint of trade in that it acted as an economic disincentive to salesmen from leaving their employment. The tribunal also found Peninsula had unlawfully deducted the amount claimed from Sweeney’s wages, even though he signed the commission rules which included a specific provision to the contrary.

The reason for this, in the tribunal’s view, was that for an employee to agree to this deduction, he must have “knowledge of the nature of that which he is agreeing or consenting to or, to put it another way, the consent must be informed consent”.

Decision overruled

Peninsula appealed to the Employment Appeal Tribunal (EAT) which overruled the tribunal’s decision on every count.

The EAT disagreed with the tribunal’s conclusion that the rules of the commission scheme were not incorporated into the contract of employment. The tribunal had found that the contract of employment was created by the exchange of the letters on 19 and 20 October 1998. The EAT disagreed with this.

Since Peninsula’s letter made it clear that the offer of employment was conditional upon Sweeney signing their standard terms and conditions, the contract of employment did not come into existence until he had signed those documents a week later. The EAT was satisfied the rules of the commission scheme were part of the contract of employment, which Sweeney had signed.

This meant that the question of whether these provisions were onerous and whether they had been brought to Sweeney’s attention before he had signed the contract were irrelevant. The tribunal had relied upon a series of cases culminating in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, the effect of which is to say where one party attempts to bind the other party to the contract with terms and conditions other than those contained in a signed document, those terms and conditions have to be flagged up especially and brought to the other’s attention (known as the Interfoto principle).

This principle does not apply in situations such as Sweeney’s, where the term which is in dispute is actually contained in the written agreement itself. The EAT envisaged a nightmare scenario if it were to follow the tribunal’s reasoning, where one party who has signed a contract attempts to escape their obligations by arguing that their attention was not brought to a certain term. Once the document is signed, that party is treated as having agreed to the terms of the contract, warts and all, and whether or not that party has read it. Therefore, the fact Sweeney had signed the document was enough. Peninsula were under no obligation to expressly draw it to his attention before signing.

Fairly and clearly

In any event, the EAT thought Section B was set out “perfectly fairly and clearly” since it was headed ‘Employees Leaving The Company’ and, where Sweeney was asked to sign the document, immediately below that space was a paragraph reminding Sweeney that the document which he was about to sign contained terms and conditions which related to “certain non-payments in circumstances of notice periods and termination of employment”.

Having found that the provisions of Section B were effectively incorporated into Sweeney’s contract, this effectively disposed of his claim for breach of contract. However, the EAT went on to deal with the tribunal’s other findings and was equally as critical.

As Sweeney was free to work for whoever he wanted once he had left Peninsula, there was no question of Section B being in restraint of trade or unenforceable.

As for the tribunal’s finding that Peninsula had made an unlawful deduction from Sweeney’s wages, the EAT referred to Section 13(1)(b) of the Employment Rights Act 1996 which provides that an employer can make a deduction from wages if the worker concerned has signified in writing his agreement or consent to the making of the deduction. Clearly, Sweeney signed the document.

Opposite conclusion

However, the tribunal concluded that this only comes into play if, when the employee signed the document, he had “informed consent” of what he was signing. Once again, the EAT disagreed.

The EAT has effectively given a step-by-step guide to employers on what to do if they want to avoid paying commission or bonuses to employees who have left employment.

The first point is to ensure the ability to withhold payment is a contractual term and that it appears in a document which the employee has signed. If an offer letter is not made conditional to certain rules then there is a risk that the acceptance of that offer could constitute the contract itself. This is what Sweeney attempted to argue.

It is equally important to ensure the document containing the rules is actually signed by the employee. Employers often choose to ensure commission or bonus schemes are always kept out of the contract so they can attempt to retain flexibility in deciding how much to award or in varying the rules of the scheme at a later stage. Employers who take this approach may encounter difficulties in withholding payment following termination of employment unless this power is set out in writing and signed by the employee.

A clause should have a large heading drawing the attention of the reader to what is to come. The paragraph should then set out in clear non-legalistic language the circumstances when commission will not be payable. Ideally, the next paragraph should emphasise that there is no contractual entitlement to this money, so there can be no claim for unlawful deduction from wages.

Finally, it will be sensible to remind the employee of the nature of the document which he or she is signing by including a paragraph next to the signature section summarising the effect of the document.

Paul Callegari is head of the Employment Group at City law firm Nicholson Graham & Jones.

Practical steps

  • The relevant term must form part of the contract. Ensure that any offer letter which is sent out separate to the contract is always expressed to be conditional on the separate rules.
  • Ensure that the rules of the scheme are contained in the document which is signed.
  • Use clear unambiguous language in the drafting of the rules. Emphasise, re-emphasise and emphasise again the effects of the rules and what the employee is signing up to.
  • Include a signature clause which expressly confirms that the employee has understood and agrees to the terms of the contract, including the clauses whereby the employer can withhold payment.

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