The Facts
Employee earns sales commission under employer’s sales program
Between May 2005 and November 2013, the employee was employed as a sales representative selling large scale printing solutions to corporate and government clients.
Her employment contract stipulated that she would be paid a base salary and could also earn commissions through the employer’s sales program.
During a six-month period between 1 November 2009 and 30 April 2010 (the “measure period”), the employee exceeded her sales quotas to such an extent that for that period she was 500% over budget.
As a result of this achievement, she calculated that for the measure period, she was entitled to $446,250.39 in commission.
Employer reviews employee’s sale plan, capping commission payable
The employer’s sales program provided that when a salesperson reached an identified performance threshold, a management review would occur. As a result of the review, management could adjust various components of the employee’s sales plan.
The employee had reached this performance threshold and so her sales plan was subject to review.
In May 2010, the employer conducted the review and placed a cap on the employee’s commission payment. This was done retrospectively, after the measure period.
Consequently, the employer paid the employee just $136,500 of the $446,250.39 commission to which she had calculated she was entitled.
Employee successfully sues employer for full payment and employer appeals
Three years after leaving her employment, the employee commenced a claim against the employer in the ACT Supreme Court for $309,750.39, the amount by which she claimed to have been underpaid, plus interest.
The employee’s claim was successful, and the employer appealed to the Supreme Court’s Court of Appeal.
Expert commentary on the court's decision
Yet, incorporating commission structures into a contract presents a double-edged problem, highlighted by this case.”
Court dismisses employer’s appeal
In Hewlett Packard Pty Ltd v Subasic [2021] ACTCA 3, the ACT’s Supreme Court, Court of Appeal unanimously dismissed the appeal by Hewlett Packard Australia (HP) to set aside judgment in favour of their former employee, Melinda Subasic.
Employer contractually bound to observe terms of sales program
The court rejected HP’s argument that the parties had mutually and expressly agreed that the terms defining the sales program were not intended to be binding in contract.
Rather, HP was contractually bound to observe the terms of the sales program for as long as the sales program remained in existence.
No discretion to cap sales commission under existing sales program
The court noted that whether the performance of HP’s contractual obligation would result in an obligation to make any payment to Ms Subasic depended on two questions.
The first question was whether the employment contract limited the method by which the sales commission could be calculated during the review process.
The court found that the review provisions did not expressly confer a discretion to cap the payments, nor did they grant a general discretion to adjust the commissions in any way the reviewer thinks fit.
The court was also unwilling to imply a discretion to impose a cap, as it would not serve the stated purpose of the sales program to incentivise high performers.
The court recognised that sales commissions are discretionary, but held that they are not administrable at the whim of the employer, nor can the employer act arbitrarily.
Employer cannot make changes with retrospective effect to sales plan
The next question the court had to consider was whether it was permissible for HP to make changes to Ms Subasic’s sales plan that have retrospective effect.
The court concluded that:
Interest calculation impacted by employee’s substantial delay in notifying employer
In addition to the principal sum of $309,750.39, the trial judge awarded Ms Subasic interest in the amount of $61,568.10. This was calculated from the date proceedings were commenced in June 2016.
Ms Subasic argued on appeal that the interest ought to have been calculated from the date the debt under the contract arose in 2010. She therefore asked that the interest on the principal sum be calculated as $194,290.84.
The court referred to the primary judge’s observation that Ms Subasic never made a formal demand for the payment of the commission while she was employed with the employer. Her reasoning was that she did not want to jeopardise the employment relationship while she was still employed.
The court also referred to the primary judge’s observation that while Ms Subasic’s action was understandable, the substantial delay meant the employer was unaware that Ms Subasic did not accept the capping of the payment to be lawful.
The court accepted that the trial judge had properly exercised her discretion in calculating the interest owed as she had.
Challenges of incorporating sales commission into employment contract
In industries that rely on sales commission payments to retain staff, such as travelling salespeople, vehicle salespeople etc, it is the usual case that employers incorporate commission structures as part of the employee’s contract.
Yet, incorporating commission structures into a contract presents a double-edged problem, highlighted by this case.
The first problem and most frequently encountered, is that when things get tough for the business, the commission structure cannot be amended without agreement with the employee, if the structure is within the contract. A party cannot unilaterally or arbitrarily change the terms of a contract.
The second problem, as raised by this case, is that even if your commission structure is outside of the contract, an employer cannot change the policy on a whim, even if the contract provides for the employer to have full discretionary power to amend or cancel the commission structure, particularly if the employer wishes to change the structure retrospectively.
If an employer wishes to make changes, they must follow a proper consultation process and allow a period of notice to the employee prior to implementing any changes.
The correct consultation process may differ between industries. It is important that the Modern Award or Enterprise Agreement applicable to the employment is referred to before an employer embarks on commission structure changes.
A similar process of consultation should be attempted for employees who are not covered by an Award.
If you are paying employees a sales commission and it needs to be changed, it is important that you obtain independent legal advice before making any changes.