How Discretionary are Discretionary Commissions?

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It is not rare to see an employment contract to state that commission payments to the employee is determined by the employer in its “absolute discretion”. But to what extent can an employer exercise its discretion.

In the recent case of Sharma v Lily Communications Ltd, the Employment Tribunal gave its judgment on discretionary commissions and held that when exercising its discretion to make commission payments, the employer will be bound by a duty to act rationally and in good faith.

The Facts

In late 2019, Mr Sharma applied for the role of Business Development Manager at Lily Communications Ltd by responding to a job advert that listed an “excellent bonus scheme”. In his job interview, Mr Sharma was told by the interviewer that he would earn 15% commission on all profit. Mr Sharma accepted the role on this basis.

Mr Sharma signed his contract of employment which did not mention the 15% commission but provided that commission will be “determined by the company in its absolute discretion”. However, Mr Sharma did not properly review the contract and continued to believe that he was entitled to 15% commission on all sales upfront.

Soon after he started his job, on 19 March 2020, Mr Sharma was furloughed due to the pandemic and remained so until 12 August 2020 when he was laid off. During the furlough period, Mr Sharma received no commission payments but was assured that they would come through. He was then paid an element of commission in his wages at the end of August 2020 but did not receive the sums he expected for the months when the business was in profit and brought claims.

The Tribunal held that the employer’s decision to withhold commission payments for months in which the business was in profit was not rational.

Commission at the Employer’s Discretion

In Sharma v Lilly Communications Ltd, the Tribunal found that Mr Sharma was not contractually entitled to be paid commissions as this was made clear in his employment contract. Therefore, it was a matter for the employer in its discretion to decide whether to pay commission, and on what basis. 

As the employer chose to exercise its discretion to pay commission to Mr Sharma and that it was the clear expectation and understanding of both parties that commission would be paid in accordance with the applicable scheme, the employer was under the obligation to act rationally and in good faith.

Act Rationally and In Good Faith

The Tribunal held that the employer’s decision to defer commission payments for furloughed employees was rational and in good faith due to the uncertainty caused by the pandemic. However, the decision to withhold commission payments for the months during furlough period when the business was in profit was not rational.

It is necessary to take into account all relevant circumstances when assessing whether an employer is exercising its discretion rationally and in good faith. The uncertainty brought by COVID 19 could be an important element that affects the result of the assessment leading to some decisions being regarded as rational that would in other times be open to challenge, however this assessment will have to be carried out on a case-by-case basis.

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This article was co-authored by Trainee Solicitor Zhuo Li.

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