SUMMARY: Many employers give their employees discretionary bonuses or commission. However, “discretionary” does not mean that employers can pay whatever amount they choose.
In a recent case, the Court of Appeal agreed with the High Court that the amount of “discretionary” commission paid to an employee should be increased.
This case is a useful reminder that an employer should be able to show that the way in which it has exercised its discretion is not irrational or perverse.
Here are our top tips for employers who want to avoid challenges by employees about how they have exercised their discretion:
- Have in place an appropriately worded clause in the contract of employment setting out that a bonus/commission is discretionary.
- Consider the reason(s) for the amount of bonus/commission you are giving to an employee.
- Record your reason(s) in writing at the date the bonus/commission decision is made so that you have evidence ready in the event of a challenge. Your record should show why and how you have reached a decision. Flipping a coin is not a rational decision-making process!
- If you want a bonus/commission scheme in place, ensure that this is suitably worded to give you flexibility. For example, the flexibility to vary or withdraw a scheme can be a useful tool.
- If you tell employees there are factors that will be taken into account in decision making (for example, in a commission scheme), ensure these factors are taken into account. If the factors change, tell employees in advance of them carrying out the work.
- Treat staff consistently. If an employee feels that they have been awarded a lower commission/bonus than others, they may claim this is on the basis of a protected characteristic (such as age, sex or disability). This could leave an employer facing a discrimination, as well as a breach of contract, claim.
If you follow these tips, you should be able to motivate your workforce with the possibility of a bonus/commission payment, but avoid claims from employees when you want or need to pay less.
Hills v Niksum Inc  EWCA Civ 115
For more details about how to set up and implement bonus or commission schemes please contact:
+44 (0) 808 172 93 22
This update is for general guidance only and does not constitute definitive advice.