The claimant in Hills v Niksun Inc had been employed for just nine months as a regional sales manager in the UK. His contract of employment referred to his employer's absolute discretion over participation in commission plans. The sales compensation plan reserved the right for the employer to determine a "fair and reasonable" level of incentive compensation. The plan also said that split commissions would be allocated according to the "point of influence" – "the location where the major account control resides".
The employer allocated 48% of the commission on an international sale of security software to the UK office. The claimant successfully challenged this in the High Court on the basis that the "point of influence" for this sale was the UK and the employer should have allocated two-thirds of the commission to the UK. Although the employer had the decision-making power on commission, it had to be exercised in accordance with the detailed terms of the plan and the High Court decided that, on the basis of documentation, it could not reasonably have reached the conclusion that the UK was not the point of influence.
The employer's appeal was dismissed by the Court of Appeal. Once the employee had shown that there were grounds for thinking that the employer's decision was unreasonable, the burden shifted to the employer to show that it wasn't. The employer's problem was that there was no evidence as to the way in which the decision was taken. This meant that the High Court judge could not assume that the decision was a rational one and he was therefore justified in deciding the point of influence himself and in setting the commission at two-thirds.
Clearly the lack of factual evidence about the allocation decision was at the heart of this decision. However, it is a further indication that last year's Supreme Court case of Braganza v BP Shipping Ltd (about an employer's decision not to pay a widow a death-in-service benefit) has altered the courts' approach to employer's contractual discretions. TheBraganza test is that the exercise of a discretion must be not unreasonable and all relevant factors and no irrelevant ones have been taken into account.