Chalmers case highlights need to check bonus scheme wording

Check your bonus scheme wording or risk paying sales reps huge pay-outs if company sales rise unexpectedly. That is the lesson from a judgment handed down by The Court of Session in Scotland that a sales rep was entitled to a bonus of almost a quarter of a million pounds.

This is the case of Mast Group v Chalmers which has been reported by Scottish Legal News. The company was seeking a declaration that its sales rep Patricia Chalmers was not entitled to bonuses she claimed was due for sales of various Covid diagnostic machines, and tests, between July and October 2020. Her contract provided for a fixed salary and bonuses of up to 5% of the value of additional sales beyond a personal year-end sales target.

Mast Group supplied diagnostic equipment during the pandemic and received a massive order from NHS Scotland. As a result, sales company hit an all-time high, including from within Chalmers’ geographic sales area. When it came to bonus time the company took the decision to change the scheme rules to limit her bonus which, under the original calculation method, had rocketed. They argued it was not applying the old scheme rules because it ‘wasn’t designed to cover this set of circumstances. They pointed to references in the contract to ‘sales achieved’ and argued that meant sales which were the direct result of Chalmers’ own efforts. Chalmers refuted that on the basis that the wording should not be construed as restricting the bonus entitlement to circumstances in which his or her efforts have led directly to a sale. The court agreed with her and ordered the company to pay her the bonus calculated under the original scheme rules which amounted to a little over £245,000.

So clearly this is an outcome which shocked the company, albeit a very welcome windfall for the sales rep in this case. So how did the court arrive at its decision and what are the lesson to take from this case? To help with that Chris Evans joined me by phone from the London office:

Chris Evans: “The key issue here was all around how a contract should be interpreted and what the court effectively said is it must be construed contextually. So, they went through a number of the tests that would apply. You need to look at the objective meaning, a purposive approach should be taken in relation to it and, equally, the court should have regard to what they call commercial common sense. Now looking at that, many employers would think, well, surely it can't cover a bad bargain and the court was quite at pains to point out that even if the parties considered this in advance, they wouldn't have agreed to a bonus allowing the individual to get nearly £250,000 worth of bonus. That wasn't the key issue here. The key issue was, how should it be constructed and, based on the parties’ understanding at the time, the bargaining position of the parties at the time, what was meant by the by the phrasing ‘achieved sales’ and what the court did was they had obviously witness evidence from the individual, and from the company, and they looked at how the bonus clause had been applied in practice in the past and what was interesting, particularly around the phrasing of ‘personal sales target’ and also ‘achieved sales’, is that personal sales target really just meant what the target was that was put in, in the relevant documentation, regardless of whether this individual had actually brought that money in or not. Equally, the same with ‘achieved sales’. So, she was effectively a part of a wider team that brought in the sales to the company and, effectively, the court said, well, it would have made a nonsense of the contract, and the clauses, if it was in a position that they would be effectively fighting over whose name was against the relevant sale whereas, actually, there should be a collegiate approach to the sales within this industry and, as a consequence of that, it found that the drafting as it was, was clear, there shouldn't be an implied term or anything of that nature which should be put into the contract restricting the amount of the bonus and, actually, what was meant by the drafting was that if sales had been made within the relevant area, she got the relevant bonus for it and, as a consequence of that, she was successful in getting a bonus payment of around £250,000.”

Joe Glavina: “So what’s the advice to employers, Chris?”

Chris Evans: “So the key thing from my perspective is that it's a real salient reminder that bonus wording must be right, and that you must properly think through the language that is used. So here, for example, the wording of ‘personal target’ or however, the language was framed, didn't necessarily directly mean her own personal sales and, as a consequence of that, she obviously got this significant pay-out. I think what it demonstrates is that when setting up a bonus scheme parties need to be really clear as to exactly what they're rewarding and how that's going to be calculated because if you do get a situation like this going forwards, where you have a significant upturn in work or something of that nature, you know, for example, with the COVID-19 situation, then you could end up in a similar scenario where there is a significant bonus payment due. Now, one thing that you can do as an employer to look to limit that kind of risk, and that potential exposure, is to apply bonus caps, for example, and ensuring that's hardwired into the agreements. Equally, revisit your wording to ensure that if you don't want future products to be taken into account, which may be novel, or maybe, you know, significantly high-earning for the business that it is made explicitly clear in the plan rules that it only relates to products that have been developed, or are being sold, as at the date the plan is put into force and, again, these sorts of things were not considered by the employer in this case. I think what's also important to remember as well is that bonuses very often become contentious on exit and there is a look back period from a limitation perspective of six years so even though you may think you're home and dry and no one's challenged your bonus wording, it doesn't necessarily mean that you won't get challenged in the future. Equally, what I would also remind employers is that claims for bonuses are limited and employment tribunal to £25,000. Now that may seem good news on the face of it, however, what it does do is to push litigation through the usual civil courts, be that county or high court, and as a consequence of that there are significant cost consequences if you lose. So, the stakes are high if your drafting is not watertight.”

On the subject of bonus payments, when it comes to discretionary bonuses, Chris has previously talked to this programme about ensuring that managers exercise their discretion lawfully over bonus payment decisions. That’s ‘Discretionary bonuses a great incentive but …’ and is available for viewing from the Out-Law website.

LINKS
- Link to judgment: Mast Group Ltd v Chalmers
- Link to HRNews programme: Discretionary bonuses ‘a great incentive’ but …