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14/04/2010

GX Networks Limited v. Greenland (Court of Appeal)

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Court of Appeal rules that it was unlawful for an employer cap an employee’s commission in spite of contractual clause that on its face reserved a discretion to the employer entitling it to do so.

Jonathan Davies successfully represented the employee in her claim for non-payment of commission both at trial in the High Court and on appeal.

Mrs Greenland had been employed by GX Networks Ltd under a contract of employment which provided that her remuneration package was to consist of three elements: basic salary, commission of up to 100 per cent of basic salary for reaching sales targets (known as the performance element of commission) and an over-performance commission which was payable where sales targets were exceeded.

The contract of employment provided two means by which the employer could control the level of commission that would be payable: firstly, it had the power to alter the employee’s targets thereby reducing the extent to which an employee would be entitled to any commission; secondly, the contract further provided that: “the sales director also has the discretion to cap an individual's Q4 bonus at 100 per cent if required, although such cases would be by exception only and required human resources and finance agreement”. The effect of capping at 100 per cent was to wipe out the over-performance element of commission entirely.

The interpretation of this clause was at the centre of the dispute between the parties. In the High Court, Mrs Greenland contended that 'by exception only' meant that the employer had to show exceptional circumstances before exercising its discretion. In the alternative, she contended that, if the clause did exist solely in the realm of discretion, the decision to cap was a breach of the implied term not to exercise any discretion on the face of the contract irrationally: Clark v Nomura International plc [2000] IRLR 766, QBD.

HHJ Shaun Spencer QC found that the clause did reserve a discretion to the sales director to cap commission. The question was then what was her reason for applying the cap and whether such reasons fell outside the band of reasonable responses. The Judge found GX Networks Ltd applied the cap because the total entitlement to commission amounted to a sum that was considerably more that it had wanted to pay. He also noted that the employer had failed to amend Mrs Greenland’s targets when it knew she was on course for exceeding them by a large amount and when the contract still permitted it to revise those targets. The sales targets for Mrs Greenland had been set too low but that GX Networks Ltd was responsible for the setting of sales targets and that it could not use money which would otherwise be the employee’s to get itself out of the hole that it was in. Those were irrelevant factors in the exercise of discretion that rendered the decision a breach of the implied term. He also distinguished Commerzbank AG v. Keen [2007] ICR 623 on the basis that that case centred on an allegation that the level of a wholly discretionary bonus was irrational whereas Mrs Greenland’s case centred on the withdrawal of commission by use of a capping clause calculated according to a contractually agreed arithmetical formula: see Greenland v. GX Networks Ltd [2009] EWHC 3760, QBD.

The Court of Appeal upheld the decision of the High Court but on different grounds. It agreed with the primary submission made before the High Court that the words ‘by exception only’ meant that the employer had to demonstrate exceptional circumstances before even considering the application of the cap. It considered that exceptional circumstances could mean where an employee has committed an act of gross misconduct or where the contracting party to the deal on which commission had been earned went bust, but not the fact that the employee had earned significantly more under the scheme than expected or that the employer had failed to control the amount of commission payable through the setting of targets. The setting of targets was the primary means of adjusting entitlement to commission and the capping clause was not a simple alternative.

 

Jonathan Davies was instructed by Emmajane Taylor-Moran of Webster Dixon LLP on behalf of the respondent

greenland.pdf
EMPLOYMENT,CONTRACTS,COMMISSION,REMUNERATION,JONATHAN,DAVIES

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