Kent Management Services Ltd v Butterfield [1990] UKEAT 407_90_1112

EAT

Kent Management Services Ltd v Butterfield

[1990] UKEAT 407_90_1112 · 1990-12-11

MR JUSTICE WOOD (PRESIDENT) : From 2 December 1988 until 10 May 1990 Mr Butterfield was employed by the Respondent Company Kent Management Services Limited as a recruitment consultant at their office at Sevenoaks.

On the termination of his employment Mr Gow, the Chairman of the Company who has appeared before us today for the company in the Appeal, wrote him a letter which is dated 17 May was confirming formally the termination of Mr Butterfield's employment on 10 May. The letter told him he would receive four week's salary in lieu of notice along with the monies due to him for outstanding annual holiday entitlement and then:

"As the commission and bonus schemes are discretionary and non-contractual, we shall not be exercising our discretion in your favour in respect of any outstanding commissions. In fact, under all the circumstances, you should consider yourself to be very fortunate that you received your annual bonus for last year"

It then proceeds to give him some advice that on reflection his attitude towards work should be improved.

The amount of commission alleged to be due was £2,494 of which only £1,227 had been paid and therefore the commission which was found to be due was the sum of £1,402.00 less tax and National Insurance. There was also an award of wages £384.00 and holiday pay £230.00, making a total of £2,016.00.

The company did not appear before the Tribunal and the Tribunal therefore only had the evidence of the applicant, Mr Butterfield, together with some documentation. The documentation which is immediately relevant is the letter of appointment of Mr Butterfield which is dated 28 November 1988. It sets out in the usual way the post and its description with his duties and then says this:

"Your commencing salary will be £14,000 per annum, payable monthly in arrears. You will participate in the commission and bonus scheme described on the attached summary. For the purpose of an annual bonus calculation, the year will commence on 1 February 1989. This may prove academic, however, if we move forward into equity participation. The annual bonus threshold will be £50,000 in the first year."

It then proceeds to deal with notice and that he is expected to work through lunch time with a sandwich and then it deals with other points of holiday and so on. The commission and bonus scheme was attached to that letter and bears a date, 1 September 1988 and is signed by Mr Gow. It is headed "Basic principles of monthly commission and annual bonus schemes for BG Appointments". Paragraphs 1,2,3 and 4 concern themselves with the method of calculation. Paragraph 5 is headed "Payment" and under sub paragraph 1 it says:

"Payment of commissions and bonuses will be subject to tax and NIC deductions."

In other words they fell within the PAYE scheme.

Paragraph 6 is headed "Change of benefit arrangements" and reads:

"The introduction of these additional commission and bonus arrangements will result in the abolition of life and medical insurance facilities."

and then at paragraph 8, is headed "Legal note" and reads as follows:

"Whereas the intention of the commission and bonus schemes is to stimulate motivation and provide a fair return for additional effort there are circumstances, however unlikely, when payment may be either not justified or not possible. An extreme example would be bankruptcy!! Consequently, for legal purposes the schemes will be defined as discretionary and ex-gratia and will not constitute a contractual arrangement with the employees concerned.

There was before the Tribunal no issue as to the amount of commission payable, it was simply said that it was not contractually payable. There was no legal obligation and therefore the company was perfectly entitled to say that the sum would not be paid.

It is only necessary to say this about the calculation, that the commission was payable on fees already received by the company, so that there was no question of payment for commission on fees or consideration that had not yet been received by the company.

The sole issue therefore for the Tribunal, the claim being for commission partly not paid under the Wages Act, is whether that commission was payable under the Act. In other words had there been a deduction under section 1 of the Act. Section 1 subsection (1) reads:

"An employer shall not make any deduction from any worker employed by him unless the deduction satisfies one of the following conditions, namely - (a)it is required or authorised to be made by virtue of any statutory provision or any relevant provision of the worker's contract; or (b)the worker has previously signified in writing his agreement or consent to the making of it."

and therefore the question is was this "wages"? and "wages" are defined by Section 7 in a fairly long section, only part of which need we read. Subsection (1) of section 7 reads:

"In this Part "wages", in relation to a worker, means any sums payable to the worker by his employer in connection with his employment, including - (a)any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise;"

Subsection (3) of Section 7 is perhaps also of some assistance. It reads:

"Where any payment in the nature of a non-contractual bonus is (for any reason) made to a worker by his employer, then, for the purposes of this Part, the amount of the payment shall - (a)be treated as wages of the worker, and (b)be treated as payable to him as such on the day on which the payment is made."

Under subsection (3) it is envisaged that a payment has in fact been made. The present case of course is that the calculation has been made, the figure is identified but it has not actually been paid. However, there is an indication that possible non-contractual bonuses shall be considered "wages" at least once they have in fact been paid.

The Industrial Tribunal addressed themselves to Section 7 and their reasoning is to be found in para 5 of the Decision. Having referred to Section 7(1) they continue:

"Clearly section 7 includes non-contractual sums and commission was payable by the respondent to the applicant under the respondent's scheme as it existed at the time that the applicant earned the commission which he now claims, ie. November 1989 and January 1990. The absence of a contractual obligation to pay is not fatal to a claim in respect of deductions under the Wages Act. At the time when he produced the fees for which the claimed commission was payable, the applicant had not received the document from Mr Gow referred to in paragraph 3 above. We are satisfied from a reading of clauses 6 and 8(1) of the document attached to the applicant's letter of appointment, that the applicant was entitled to presume that commission was going to be paid to him, albeit that there was no contractual obligation on the part of the respondent to do so. The commission was therefore "payable" within the meaning of section 7(1) of the Act, and, of the total commission earned by the applicant during November 1989 and January 1990, ie. £2,629.00 the respondent withheld £1402.00. That was a deduction which contravened section 1(1) of the Wages Act."

and then they make their calculation for the award in a slightly different way.

Mr Gow has argued and argued ably, that the wording of paragraph 8 of the Commission Scheme is such that there is no obligation whatsoever to pay that money. It is purely discretionary and until it is actually paid it is clearly not payable and is not payable under the Act because, he claims, that an employer is perfectly entitled to reach agreement as to some terms of employment which are not to be of contractual force. He says that the words "discretionary" and "ex-gratia" are clearly set out there and he therefore indicates that the company takes the point that it is simply going to refuse that commission although in ordinary parlance it would have been said to have been "earned".

It is first of all necessary for us to look at paragraph 8 and to see what its true meaning is as we construe it. It seems to us that there are various parts of that paragraph which are identifiable and that the paragraph is in fact fairly clear. The intention first of all is set out:

"Whereas the intention of the commission and bonus schemes is to stimulate motivation and provide a fair return for additional effort"

pausing there, it refers to "schemes" and the purpose of the scheme to stimulate motivation and provide a fair return for additional effort. It then goes on:

"there are circumstances, however unlikely, when payment may be either not justified or not possible. An extreme example would be bankruptcy!!"

It is clear from that that there are unlikely circumstances when payment would be impossible. That is one thing, it is not suggested it is impossible here, or not justified. But normally by inference the circumstances will be such that commission when earned, will be paid. An extreme example would be bankruptcy. That indicates to us as construing that paragraph that the circumstances referred to are extremes, or tend to be extremes and certainly unusual. Then the paragraph goes on:

"Consequently, for legal purposes the schemes will be defined as discretionary and ex-gratia and will not constitute a contractual arrangement with the employees concerned."

This must be a form of agreement or clause which is to be found in many situations in employment. If reasonable notice is given clearly these schemes can be varied and altered and might be abolished, but whilst the schemes are in being the anticipation will be that in normal circumstances commission will be paid on work which has been carried out and on which the calculation is based and the anticipation of both parties is clearly that it will be payable. There may be circumstances such as breach of the terms of the Contract of Employment or other circumstances where it may be said "No, there is a good reason why it should not be paid". But it is anticipated that in the ordinary circumstances if it is earned, it will be paid. Mr Gow suggests that it would not be possible to mention every single possible reason for not paying it. During submissions we pointed out that a very simple wording could have been included such as " all payments of commission and bonus are dependent upon satisfactory performance and compliance with the Contract of Employment to the date of the payment ". Something of that nature. That is not so here.

Therefore looking at the definition of "wages". First of all was this a sum payable to the worker by his employer in connection with his employment? It seems to us, reading the documentation that this was clearly a sum payable "in connection with his employment". It was within the reasonable contemplation of both parties that in ordinary circumstances, and there is no suggestion on the documentation nor in front of the Tribunal that there were any special circumstances for non-payment, it was payable.

Subsection (1)(a) deals with the phrase "whether payable under his contract or otherwise". Again, that indicates that perhaps the payment need not be contractual but would normally be expected and the Tribunal took the view that that was this case. We also accept that view, perhaps having analysed paragraph 8 in rather a different way from the Tribunal. We are quite satisfied there was no error of law here and we are happy to do so

because on the facts before us the Industrial Members take the view that this should have been paid and I respectfully agree with them. This Appeal is dismissed.