United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For Mr Moss, Mr Fenton and Mr Brennan	MR D SCOREY (of Counsel) Messrs Charles Russell Solicitors 8-10 New Fetter Lane London EC4A 1RS
For Mills & Allen Ltd	MR R D HENDRY (Representative) Collinson Grant Consultants Ltd Colgran House 20 Worsley Road Swinton Manchester M27 5WW


 


JUDGE PETER CLARK: We heard these three appeals together. They involve the same employer, Mills & Allen Ltd ['the Company'] and three former employees, Messrs Moss, Brennan and Fenton ['the applicants'], each of whom brought separate claims against the Company heard by different Employment Tribunals. The appeals raise one common issue in relation to the applicants' entitlement to certain commission payments following termination of their employment with the Company on 31st July 1998 ['the commission point'] and a further issue relating to the case of Mr Moss only concerning the tribunal's assessment of compensation for unfair dismissal in his case ['the remedies point'].

A common approach

1. As a result of these cases being heard by different Employment Tribunals the findings of fact in each case differ. For the purposes of these appeals it has been agreed between the parties that the commission point will proceed on the basis of agreed facts common to all three cases and agreed issues of law notwithstanding that not every issue was specifically raised below. We accept that approach, having regard to what was said by the Court of Appeal in Jones v Burdett Coutts School [1998] IRLR 521, on the basis that there is here a reciprocal agreement by the advocates before us which will allow all issues to be properly and comprehensively ventilated. Mr Scorey appears on behalf of the three applicants and Mr Hendry on behalf of the Company.

Background

2. The Company carried on an outdoor advertising business with a number of poster sites throughout the country and with offices nation-wide. It conducted its sales activities through three sales teams, National, Regional and Direct. The National Sales Team in London was responsible for securing sales of poster sites through advertising agencies.
3. At the time of their dismissal by reason of redundancy on 31st July 1998 all three applicants were employed as Accounts Managers in the Direct Sales Team, which sold advertising space direct to local businesses without normally engaging advertising agencies. All three commenced their employment as Sales Executives and were later promoted to Accounts Manager. Mr Fenton and Mr Moss were based at the Company's London office and Mr Brennan at the Leeds office. Their employment began on the following dates: Mr Brennan, 25th March 1992; Mr Fenton, 22nd March 1993 and Mr Moss, 24th March 1994. Each was initially employed on terms and conditions contained in a contract of employment in writing. Those contracts were in standard form. Each was entitled to a basic salary and commission and bonus. The applicable commission and bonus scheme altered from year to year. We shall return to the detail of those schemes later in this judgment.
4. At the beginning of July 1998 the applicants and other members of the Direct Sales Team were informed that due to a restructuring they would be made redundant. As a result they were dismissed with effect from 31st July 1998.

Unfair dismissal

5. In each case the respective Employment Tribunals found that the applicant was unfairly dismissed by reason of redundancy. For present purposes we are concerned only with the unfair dismissal of Mr Moss.
6. His Originating Application, presented to the London (North) Employment Tribunal on 30th October 1998, included a claim of unfair dismissal. That complaint came before an Employment Tribunal chaired by Mr C A Carstairs ['the Carstairs tribunal'] on 8th February 1999. That tribunal found the dismissal by reason of redundancy to be unfair on the grounds, first that there was a total absence of consultation with the applicant by the Company prior to the redundancies being announced and secondly because although Mr Moss had applied for the post of Regional Sales Executive he was not even interviewed for that post.
7. Turning to the question of remedies for unfair dismissal, the applicant having received a redundancy payment equivalent to the basic award, the tribunal approached the compensatory award in this way. They found that had proper consultation taken place the applicant's employment would have been extended by one month. Accordingly they awarded him one month's net pay.
8. As to the chance of his being appointed to the alternative position of Regional Sales Executive they recorded, at paragraph 8 of their reasons, that the applicant's evidence was that he could not say if he would have taken that post if it had been offered to him. The tribunal describe his evidence in this respect as "extremely ambivalent."
9. On that basis the tribunal concluded that there was a 90% chance that the applicant would have been dismissed for redundancy in any event because he would not have accepted the alternative post. They awarded him nine months additional loss of earnings, reduced by 90% to reflect that loss of a chance, ['the Polkey deduction'].

The remedies point

10. Mr Moss appeals against the Polkey deduction in his case. In support of this part of his appeal Mr Scorey submits that the tribunal's findings were internally inconsistent. "Extreme ambivalence" as to whether he would have accepted the alternative post if it had been offered necessarily amounts to a 50/50 chance that he would have accepted it. The tribunal ought, in these circumstances, to have reduced the award for future loss of earnings by 50%, not 90%.
11. We cannot accept that any error of law on the part of the Carstairs tribunal is here made out. An assessment of the Polkey deduction is necessarily a less than precise science. The tribunal had to weigh up not only what were the chances of the applicant accepting the alternative position if it were offered, but also whether it would have been offered by the Company. It viewed the matter in the round, having heard all the evidence and reached what we regard as a permissible conclusion. In these circumstances we shall dismiss Mr Moss' appeal on the remedies point.

The Commission point

12. It is necessary, in order to determine the various issues of law raised by the Commission point, first to set out the contractual position chronologically.
13. On commencing his employment each applicant signed a contract of employment as a Sales Executive which set out the basic annual pay and provided for a commission and bonus scheme which thereafter changed annually. In the case of Mr Brennan it was the 1992 Scheme and those of Messrs Fenton and Moss the 1993 Scheme. We shall set out the principal features of each annual scheme shortly, but it is important to note at this stage that in each initial contract of employment entered into by the applicants this provision appears (in Mr Brennan's case the layout is different but the provisions are identical):

"You should note the following points in relation to this scheme:

1. No allowance is given for sick leave.

2. Allowances will be made for holidays providing at least 2 weeks notice is given for up to an including two days leave. Any more than two days will require at least 6 weeks notice.

3. No allowance is given for public holidays.

4. Payment under this scheme is subject to your being in the employment of the company at the time of payment and not under notice, whether given or received." ["The termination clause."]

14. The main features of each annual scheme were as follows:

1992/3: The commission element consisted of a percentage payable dependable on the contract value of sales processed and attributable to the individual sales executive. In addition there was a bonus of 3% commission in certain specified circumstances.

1994: In addition to sales commission the bonus entitlement included an uplift of 1% commission for two year contract sales and 2% for three year contract sales.

1995: The structure of the Scheme remained as for 1994, but with alterations to the percentages.

1996: For the first time this provision appeared:

"Notwithstanding the rules of this scheme bonus will be payable solely at the Company's discretion."

1997: The details of the commission and bonus scheme changed. Material to this case was the following new provision:

4. Anniversary Renewals

As anniversary renewals do not form part of the target, they do not form part of the on target earnings. Commissions on these contracts will be paid at the same standard rate (no bonuses or penalties) that they attracted when the contract was originally processed."

And at Clause 7:

"7. Miscellaneous

i) Renewal contract processed in subsequent quarters to which they were issued will attract the same commission percentage applicable when the contract was issued and not the rate that applied to the quarter in which they are processed. In addition these contracts will not contribute to the quarter target in which they are processed.

ii) Notwithstanding the rules of this scheme, bonus will be payable solely at the Company's discretion.

iii) Commission payable under this scheme is considered to be pensionable.

iv) Mills & Allen reserve the right to alter the terms and conditions of the commission scheme in any way with one month's notice in writing.

All other terms and conditions of employment remain the same."

1998: The provision as to anniversary renewals was altered to read:

"As anniversary renewals do not form part of the target process and as a result do not form part of the 'on target earnings', anniversary renewals will attract a 'standard' commission rate of 16% of the annual contract value. In addition they will also be subject to monthly and quarterly bonuses where applicable at a further 2% respectively, if the monthly and quarterly targets are achieved in the months and quarters that the anniversary contracts are processed."

Clause 7 read identically with Clause 7 of the 1997 Scheme. However, these words were omitted from the 1998 Scheme:

"All other terms and conditions of employment remain the same."

The commission claims

15. Each applicant claims that following the termination of his employment on 31st July he remained entitled to commission payable for future anniversary renewals on the basis of the 1998 Scheme. Thus, for example, if prior to termination the applicant effected an advertising contract with a customer for three years, on each anniversary of its inception he would be entitled to commission of 16% of the annual contract value. It is accepted by Mr Scorey that the applicants would not be entitled to the further 2% bonus, which was dependent on each achieving sales targets which no longer applied following termination. Although described as "renewals", in truth the payment became due provided that the contract remained extant on each anniversary.
16. The claims are put on the basis of breach of contract and/or unlawful deductions from wages.

The Employment Tribunal decisions

17. The respective tribunals in these three cases reached the following conclusions:

Fenton

In his case an Employment Tribunal sitting at London (North) under the Chairmanship of Mr Lincoln Crawford ['the Crawford tribunal'] on 2nd December 1998 found, in a decision with extended reasons promulgated on 1st March 1999:

(1) that the termination clause in his original contract of employment did not apply to the 1998 Scheme.

(2) that even if it were a term of the 1998 Scheme that the termination clause applied, the Company could not rely upon its unfair dismissal of Mr Fenton to deny him his entitlement to subsequent anniversary renewal commission. We pause to record that Mr Scorey, on behalf of Mr Fenton, does not seek to support this finding by the Crawford tribunal. We think that that concession is properly made. That fact that termination of the employment by the Company was statutorily unfair cannot affect the contractual position so far as payment of post-termination commission is concerned.

(3) that although the 1998 Scheme was discretionary, it was reasonable for Mr Fenton to expect that he would be paid anniversary renewals post-termination.

In these circumstances the tribunal held that there was an unlawful deduction from wages in his case. Against this decision the Company appeal. (EAT/549/99)

Brennan

His claim came before an Employment Tribunal sitting at Leeds on 21st December 1998 chaired by Mr I K R Brown ['the Brown tribunal']. By a decision with extended reasons promulgated on 29th January 1999 that tribunal found:

(1) Like the Crawford tribunal, that the 1998 Scheme did not include the termination clause, because:

(a) the 1998 Scheme and the original 1992 contract of employment were distinct and

(b) it was not necessary to imply a term equivalent to the termination clause in order to give the 1998 Scheme business efficacy.

(2) however, the 1998 Scheme was discretionary and the Company's decision to exercise its discretion by not paying post-termination anniversary renewals commission was neither unlawful nor improper.

(3) that the calculation method for anniversary renewals in Clause 4 of the 1998 Scheme presupposed that the employee remained in employment.

In these circumstances the Brown tribunal found that Mr Brennan was not entitled to any further commission post-termination. Against that decision Mr Brennan appeals. (EAT/418/99)

Moss

The Cartstairs tribunal held:

(1) that although "morally reprehensible", payment of commission under the 1998 Scheme was discretionary and therefore unenforceable, and

(2) the provisions of the Unfair Contract Terms Act 1977 ['UCTA'] did not apply.

Accordingly they dismissed his complaint of breach of contract, based on his claim to post-termination anniversary renewals. Against that decision Mr Moss appeals. (EAT/490/99)

Issues in the appeals

18. Mr Scorey, with the agreement of Mr Hendry, has helpfully identified the following issues for determination in the appeals on the commission point:

(1) whether the termination clause contained in the applicants' initial contract of employment formed part of the 1998 Scheme or whether entitlement to anniversary renewals under the 1998 Scheme was distinct from the original contract of employment.

(2) whether there was, in the alternative, to be implied into the 1998 Scheme, in order to give it business efficacy, a term equivalent to the termination clause.

(3) whether the mechanism for calculating the amount of the anniversary renewal bonus provided for in the 1998 Scheme, which assumed that the employee would remain in employment, meant that commission was not payable in respect of anniversary renewals post-termination.

(4) whether the Company, by virtue of Clause 7(ii) of the 1998 Scheme could lawfully refuse to pay the anniversary renewals commission or whether such an exercise of discretion would be unreasonable.

(5) whether anniversary renewals commission payable post-termination forms part of the wages payable to the employee, so that failure to make such payment is capable of amounting to an unlawful deduction from wages for the purposes of s.13 of the Employment Rights Act 1996 ['ERA'].

(6) whether UCTA is applicable to the contract of employment and/or the 1998 Scheme and if so, whether the Company's construction of the contract, which includes the termination clause, is contrary to UCTA.

Our judgment

19. Having considered the submissions made on these issues by Mr Scorey and Mr Hendry we find ourselves divided in the result. We shall deal with each issue, using the numbering above, to explain where we agree and where we differ.

(1) It is on this first, critical issue that we part company.

The majority, Lord Davies and Mrs Vickers, accept Mr Scorey's submission to the following effect. In each case the initial contract containing the termination clause applied only to the particular Scheme then in force. The termination clause refers specifically to "this scheme". The 1992 and 1993 Schemes do not include anniversary renewals. From 1994 onwards each annual commission scheme is contained in a separate letter sent to the employee. On this basis the termination clause does not apply to the 1998 Scheme. On this point the Crawford tribunal was correct.

Mrs Vickers also points out that whereas the 1997 Scheme specifically provides that all other terms and conditions of employment remain the same, the 1998 Scheme does not. Thus, even if the termination clause applied to the 1997 Scheme, by omission it does not apply to the 1998 Scheme on which the applicants' claims are based.

Lord Davies is struck by the history of alterations to the Scheme. Whereas in 1992 and 1993 there was no scope for commission becoming due after termination of employment, that changed with the introduction of anniversary renewals commission in 1997. Neither the 1997 or 1998 Scheme contained the termination clause, those schemes being discrete and separate from the initial contract of employment. Further, he takes the view that by effecting a contract for a period in excess of one year, the employee had done all the work necessary to entitle him to commission due on that contract. Instead of receiving that commission at the outset the Scheme provided for staggered payments of commission on an annual basis, subject to the contract with the customer remaining in force at the anniversary date.

I take a different view on the proper construction of the contracts. A written contract of employment may consist of an initial contract, setting out the relevant terms and conditions of employment, which terms may be subsequently varied by agreement between the parties. That is what, in my judgment, happened here.

It is not correct to view each annual commission scheme as a separate and discrete contract. What happened was that, year by year, a new commission and bonus scheme was agreed in substitution for the previous year's scheme.

Although the structure of commission and bonus payable altered from year to year, as did the basic salary of the applicants following their promotion to Accounts Manager, the original notes in relation to this scheme remained in force throughout each applicant's employment, with the substitution of the new annual scheme for that of the previous year.

Thus, for the purpose of operating the Scheme, in force from time to time, no allowance was given for sick leave or public holidays when calculating whether the employee had reached the relevant sales target. More particularly, it was made clear from the outset of each applicant's employment that no payment of commission would be made once notice of termination of employment had been given. Each applicant agreed to that term.

The 1997 Scheme included, it seems to me for the avoidance of doubt, a provision that all other terms and conditions of employment remained the same. In my view that included the termination clause. The fact that that formula was not expressly repeated in the 1998 Scheme cannot, in my view, mean that earlier terms and conditions which had not been varied by the 1998 Scheme ceased to apply. They did.

Nor am I persuaded that the nature of anniversary renewals overcomes the contractual position as I find it to be. The question of construction does not depend upon whether the salesman had done everything necessary to earn his commission, as in the case of anniversary renewals. The question of whether an employee is entitled "run-off" commission following termination of employment is a vexed one in the absence of express agreement. That, no doubt, is why the Company made it clear at the outset of the employment that no commission would be paid after employment ceased. The applicant agreed to that term. Nothing which happened subsequently removed that term from the contract of employment on which their breach of contract claims are based.

In these circumstances I would uphold Mr Hendry's submission that the applicants were each precluded from showing that the Company was in breach of contract by not paying post-termination anniversary renewals commission.

(2) We are all agreed that, in the absence of the termination clause being an express term of the contract at the date of termination, 31st July 1998, the Company has not shown that it is necessary for business efficacy to imply such a term. Thus, on the majority's view on the first issue they reject Mr Hendry's alternative contention that such a term is to be implied. On my analysis, that such term is express, the question of an implied term does not arise. Had it done so, I would have agreed with the majority.

(3) The majority accept Mr Scorey's submission that within Clause 4 of the 1998 Scheme a distinction can and should be drawn between the entitlement to 16% commission on annual renewals and the additional 2% bonus tied into sales targets. The former is freestanding and not dependent on continued employment; the latter is tied into sales targets and thus not payable post-termination.

I disagree. In my view Mr Hendry is correct in submitting and the Brown tribunal was right in finding that, reading Clause 4 as a whole, the payment of both commission and additional bonus of 2% presupposed that the employee was in employment at the annual renewal date. This further confirms my construction of the contract under (1) above.

(4) Mr Hendry submits that the 1998 Scheme was, on its face discretionary. Accordingly it was open to the Company to decline to pay post-termination anniversary renewals commission to the applicants.

On this issue the majority prefer the submission of Mr Scorey to this effect. The anniversary renewals commission had been earned when the Company entered into the relevant contract with the customer. Any discretion in the employer to withhold payment of that commission must be exercised in good faith and not capriciously. Clark v BET [1997] IRLR 348. Refusal to pay commission simply because the employee has ceased employment amounts to a capricious exercise of that discretion. Alternatively, even if the applicants are unable to show a breach of contract on the part of the Company, the applicants could reasonably expect payment of post-termination anniversary renewals commission and failure to pay such commission on each anniversary of the contract remaining in force amounts to an unauthorised deductions from wages. Kent Management Services v Butterfield [1992] ICR 272.

On my construction of the contract I would hold that no question of the Company exercising its discretion under the contract need arise. The Company was entitled, by the express termination clause, not to pay any commission after termination. So far as the question of reasonable expectation is concerned, in my view the principle in Butterfield does not apply here. Since the applicants expressly agreed that they were not entitled to post-termination commission payments, they can have had no expectation that they would receive such payments.

(5) The next question, which might perhaps have been more conveniently inserted before issue (4), is whether the payment of commission after termination of employment is capable of falling within the definition of wages in s.27(1) ERA. On this issue we are all agreed that (a) commission is specifically contained within the definition in s.27(1)(a) and (b) more particularly, that commission payable following termination of employment falls within that definition. See Robertson v Blackstone Franks Investment Management Ltd [1998] IRLR 357 (CA).

(6) The question raised by Mr Scorey as to the application of UCTA in these cases does not strictly arise on the findings of the majority, but is material to my conclusions on the express term of the contract, the termination clause, under issue (1). I reject Mr Scorey's submissions on this issue.

Mr Scorey has referred us to the judgment of Morland J in Brigden v American Express Bank Ltd [2000] IRLR 94 (QBD). In that case his Lordship held:

(1) that contracts of employment are within the scope of s. 3 UCTA, but that,

(2) a clause in the claimant's contract of employment providing for dismissal by notice or payment in lieu of notice during the first two years of employment without implementation of the contractual disciplinary procedure did not fall within s.3(2) UCTA because it was not a contract term excluding or restricting the liability of the defendants in respect of breach of contract or entitling the defendants to render a contracted performance substantially different from that which was reasonably expected of them or to render no performance in respect of any part of their contractual obligations. Although expressed in negative terms, the clause set out the claimant's entitlement and the limits of his rights.

In my view, applying the same reasoning, the termination clause set out the applicants' entitlement and the limit of their rights. They were entitled to anniversary renewals commission up to the termination of their employment (or, more strictly, the date of notice of termination) and no further. It does not fall within s.3(2)(b) UCTA.

Conclusion

20. It follows that I would allow the Company's appeal in Fenton and dismiss the appeals by the applicants in Moss and Brennan on the commission point for the following reasons:

(1) each applicant was bound by an express term of his contract of employment, the termination clause, which precluded him from claiming a contractual entitlement to post-termination anniversary renewals commission.

(2) the termination clause did not fall within s.3(2) UCTA so as to have to satisfy the requirement of reasonableness under that subsection.

(3) the applicants cannot, in these circumstances, show that they had a reasonable expectation that they would receive post-termination payment of commission.

(4) in these circumstances their claims, both of breach of contract and unlawful deductions from wages, fail.

21. However, the majority reach the opposite conclusion. They would dismiss the Company's appeal in Fenton and allow the applicants' appeals in Moss and Brennan, substituting a finding that each applicant is entitled to a declaration that he has suffered unauthorised deductions from his wages. Although formally they would order that each case be remitted to the same or a different Employment Tribunal, at the appropriate Regional Chairman's discretion, for calculation of the amounts unlawfully deducted in each case, we understand from the parties that they will be able to reach agreement as to the sums involved.

Their reasons for so finding are:

(1) that the termination clause did not form part of the 1998 Scheme, which was separate and discrete from the original contract of employment.

(2) that no such term fell to be implied into the 1998 Scheme and the structure of clause 4 of that Scheme did not require employees to be in employment for the purposes of receiving post-termination commission, as opposed to bonus.

(3) that the Company's contractual entitlement to exercise its discretion in favour of not paying post-termination commission was subject to the obligation to act in good faith and in a way that was not capricious. That their refusal to pay anniversary renewals post-termination was capricious.

(4) Alternatively the applicants had a reasonable expectation that they would receive post-termination commission on anniversary renewals and failure to make such payments amounted to an unlawful deduction from wages (as defined in s.27(1)(a) ERA) for the purposes of s.13(1) ERA.

Order

22. The majority view prevails. Accordingly the appeals of Mr Moss and Mr Brennan are allowed on the commission point; Mr Moss' appeal on the remedies point is dismissed; the Company's appeal in the case of Mr Fenton is dismissed. There will be a declaration in each case that the applicant has suffered an unlawful deduction from his wages. The further question of remedy for unlawful deductions is remitted to the Employment Tribunal, subject to agreement to the parties.

Permission to appeal

23. Any application for permission to appeal to the Court of Appeal should, in the first instance, be submitted to the EAT in writing, marked for my attention, within 14 days of the promulgation of this judgment.