Subasic v Hewlett-Packard Australia Pty Ltd
[2020] ACTSC 2
•30 January 2020
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Subasic v Hewlett-Packard Australia Pty Ltd |
Citation: | [2020] ACTSC 2 |
Hearing Dates: | 10 - 12 December 2018 |
DecisionDate: | 30 January 2020 |
Before: | McWilliam AsJ |
Decision: | See [118] |
Catchwords: | EMPLOYMENT – Contract of employment – breach – failure of employer to pay incentive payments – whether contract permitted discretion to cap incentive payments to employee – whether implied terms of good faith and duty to cooperate |
Legislation Cited: | Court Procedures Rules 2006 (ACT) r 1619 |
Cases Cited: | Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; 69 NSWLR 558 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 |
Parties: | Melinda Subasic (Plaintiff) Hewlett-Packard Australia Pty Ltd (ACN 004 394 763) (Defendant) |
Representation: | Counsel I Taylor SC with D Snyder ( Plaintiff) J Fernon SC with J Larkings ( Defendant) |
| Solicitors Just Dispute Resolution (Plaintiff) Baker & Mackenzie (Defendant) | |
File Number: | SC 437 of 2016 |
McWilliam AsJ
The plaintiff, Melinda Subasic, was formerly employed by the defendant, Hewlett-Packard Australia Pty Ltd (ACN 004 394 763) (the Employer). She has brought proceedings seeking to recover $309,750.39 in commission (plus interest), which she alleges is payable as a result of sales she made while employed with the Employer over a six-month period from 1 November 2009 to 30 April 2010 (the Period).
The claim
By way of general overview of the facts giving rise to the dispute, Ms Subasic was employed as a sales executive, dealing mostly with government agencies as customers of the Employer. She was paid by the Employer in two ways. The first component was a fixed sum or base salary. The second was through a performance payment. If Ms Subasic met certain sales targets, she would receive an additional sum described as a Target Incentive Amount (TIA).
For the Period in question, there was a further incentive. In addition to the TIA payable, if Ms Subasic achieved a specified sales quota, any sales that Ms Subasic achieved above her sales target earned her extra money. The extra commission was calculated at a more generous rate, the basis for which was set out in a policy of the Employer.
During the Period, Ms Subasic was given her sales target or quota, which she met. Indeed, she achieved sales of more than five times the target set. As a result, she was expecting a significant sum of money by way of her incentive payment for the Period, being the TIA plus the extra commission at the accelerated rate, which amounted to $446,250.39. She had been able to calculate the amount precisely because the rates were set out in a sales letter issued to her, pursuant to the Employer’s compensation policy and she had access to her sales figures through a computer system program.
However, that expectation was not met. Ms Subasic was paid $136,500, which was an amount equating to 350% of her TIA.
Ms Subasic queried why she had not received the additional incentive payment she believed was owing in March and twice in April 2010. She claims that representatives of the Employer led her to believe that the delay in payment was not because there was any difficulty, and that she would be paid the following month. Accordingly, she kept working hard to achieve further sales on top of what she achieved in those two months. After the Period had concluded, Ms Subasic was informed for the first time that a decision had been made to cap her incentive payment or commission at 350% of the TIA.
Ms Subasic ultimately left the Employer in November 2013 and these proceedings were commenced on 17 June 2016. They concern whether the Employer was legally entitled to refuse to pay the extra commission that Ms Subasic believes she has earned over the Period, being the sum of $309,750.39, plus interest and costs. The calculation of that figure as being the incentive sum payable absent any cap is not in contest in these proceedings.
Ms Subasic ultimately proceeded on a second further amended Statement of Claim, filed 10 December 2018, at the commencement of the hearing. The claim is put three ways. The first two are for a breach of contract, based on an express entitlement to commission in accordance with certain parameters set out in a sales letter covering the Period, and alternatively on implied contractual duties of good faith and co-operation. The third claim is based on estoppel, either in equity (promissory estoppel), or at common law (estoppel by representation).
The Employer alleges that Ms Subasic is not entitled to the amount claimed because the amount of commission paid to Ms Subasic was limited or capped in the exercise of the Employer’s discretion, which was itself exercised in accordance with Ms Subasic’s employment contract and conditions.
The Employer further alleges that there was no conduct on its behalf which would give rise to compensation on the basis of estoppel.
The Issues
The parties do not dispute that there was an employment contract. In 2005,
Ms Subasic signed a contract for employment with the Employer for the position of an End-User Sales Representative (Employment Agreement).
It is also not in dispute that the Employer capped the sales commission at 350% of
Ms Subasic’s TIA, and has not paid the sum claimed.
The issue is as to the terms of the Employment Agreement at the material time, being the Period when Ms Subasic made the sales said to give rise to the incentive payment. The parties disagree as to whether the Employment Agreement created a contractual obligation to pay an incentive to Ms Subasic in addition to her base salary either in express terms (Issue 1) or impliedly through an obligation of good faith or a duty to co-operate (Issue 2).
If the Court finds there was a contractual entitlement to the TIA and any additional incentive payment calculated in accordance with the regime set out in the Employer’s policy, the parties then disagree on whether such entitlement was subject to the discretion or approval of the Employer, and if so, the nature of the scope of the discretion to be exercised (Issue 3).
If both claims based on the terms of the Employment Agreement fail, then the issue becomes whether the Employer ought by prevented from capping the commission payable at 350% of the TIA value by reason of a common law estoppel by representation and/or equitable estoppel (Issue 4).
Finally, there is the question of the loss suffered by Ms Subasic, depending on the Court’s findings as to the other issues (Issue 5).
Outline of the parties’ arguments
The primary argument for Ms Subasic is that there was a contractual obligation to pay the incentive payment and that it was not subject to the exercise of the Employer’s discretion. The Employer has breached the obligation to pay the additional commission and Ms Subasic is entitled to payment as a debt due and owing under the contract.
Alternatively, if the incentive payment was at the Employer’s discretion, it was subject to the implied obligations of good faith and a duty to cooperate in the Employment Agreement. Any discretion was to be exercised reasonably, and not capriciously or arbitrarily. A reasonable exercise of the discretion would not have capped
Ms Subasic’s entitlement to commission. Ms Subasic is therefore entitled to damages in the same sum.
In its Defence to the Second Further Amended Statement of Claim filed on
18 December 2018, the Employer denies that it was a contractual term of the Employment Agreement that the Employer would pay incentive payments. Instead, it says Ms Subasic was entitled to payment described as a ‘Total Remuneration’, with an invitation to participate in the Program that included the TIA payment regime. Both the Program and the TIA were subject to change or cancellation at the Employer’s discretion at any time and were aligned to market date research conducted from time to time by the Employer.
As a consequence, the Employer also denies that the Employment Agreement obliged the Employer to set out the terms of the Program in sales letters.
The Employer further claims that the Employment Agreement included General Terms and Conditions (General Terms), which might periodically be altered, and that the Employer had a number of policies, procedures, practices and benefits which applied to Ms Subasic. By the General Terms, Ms Subasic agreed to abide by any policies, procedures, practices and benefits that governed the benefits the Employer implemented, as varied from time to time by the Employer at its discretion.
However, to the extent that the contents of any policies, procedures, practices or benefits referred to obligations on the Employer, these were guides only and were not contractual terms, conditions or representations on which Ms Subasic was able to rely.
Relevant to that argument is the legal status of a sales letter dated 23 December 2009 setting out the target for the performance payment, or payment of commission, for the Period (Sales Letter). Ms Subasic argues it was to be read with the Employment Agreement and formed part of the contract. The Employer argues it was merely a guide for sales performance issued under a policy, from which the Employer could freely depart.
On the alternative claim, based on duties of cooperation to enable the other party to have the benefit of the Employment Agreement and/or of good faith in the performance of the Employment Agreement, the Employer denies that either of those terms are implied terms of the Employment Agreement.
With regard to the estoppel claim, Ms Subasic alleges that the Employer made various statements to her during the Period assuring her that her commission or incentive payment would not be capped. Relying on those assurances, Ms Subasic continued to obtain sales which would otherwise have occurred in the following period (and on which she could have claimed commission).
The Employer denies that the conversations that took place between Ms Subasic and representatives of the Employer were representations that the commission above a certain threshold would be approved, so as to cause Ms Subasic to adopt that assumption. The Employer further contends that even if what was said did amount to such a representation, Ms Subasic has not established that she acted in reliance of those communications, that the Employer knew or intended that she do so, and that she suffered any detriment if the assumption adopted by Ms Subasic is unfulfilled.
Summary of findings
For reasons that follow, I have found that there was a contractual entitlement to payment of the incentive amount as calculated in accordance with the criteria established by the Employer. In the alternative, the contract contained an implied duty to act in good faith, which the Employer breached in capping the payment of commission to Ms Subasic without prior notice to Ms Subasic and after she had performed the work which would have entitled her to the incentive payment in question.
As a result, it has been unnecessary to decide the claim based on estoppel, although I have made some brief factual findings should my reasons regarding the first two claims be later found to be wrong.
Before dealing with each issue in detail, it is helpful to set out the applicable legal principles.
Applicable legal principles
The legal representatives for the parties have assisted the Court by each filing detailed written closing submissions setting out the applicable legal principles, which do not appear to be controversial and have been incorporated in what follows below.
General principles for construing a contract of employment
The general principles of construction of commercial contracts also apply to employment contracts: Cushman & Wakefield (NSW) Pty Ltd v Farrell [2017] NSWCA 24 at [58]; Leahy v CSG Business Solutions (Aus) Pty Ltd [2017] FCA 1098 (Leahy) at [174].
The rights and liabilities of the parties to a contract of employment are to be determined objectively, by reference to the text of the contract as well as any document referred to in its text, and the purpose of the contract: Leahy at [174].
The subjective beliefs or understandings of the parties are not relevant in determining rights and liabilities under a contract. Rather, when working out the meaning of the terms of a contractual document, the Court considers what a reasonable person would have understood them to mean. Usually, that requires consideration of the text, the surrounding circumstances known to the parties, and the purpose and object of the transaction: see Toll (FCGT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 (Toll) at [40] and the authority there-cited.
Any provision which seeks to restrict liability must be strictly construed: GX Networks Limited v Greenland [2010] EWCA Civ 784 (GX Networks) at [18].
Bonus or incentive clauses
The proper construction of a bonus or incentive clause depends upon the individual circumstances of the case: Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 135.
Depending on the words used in the clause, an employee may be entitled to an incentive payment or bonus as an entitlement, such as in Walker & Sherman v Andrew [2002] NSWCA 214 (Walker v Andrew) at [35]. That was a case where a company had gone into liquidation and there was a dispute between the employees, the receivers and various creditors about whether the bonuses provided for in the employee deeds were contractual entitlements. The NSW Court of Appeal found that there was an entitlement to a bonus as of right, not discretion, holding that the language of the particular clause of the employment deed pointed generally to a conclusion that subject to satisfactory performance, a bonus would be paid, as of right. Although the amount of the bonus for the year in question was not fixed at the time of the execution of the employment contract, the law imposed an obligation to pay a reasonable sum: Walker v Andrew at [41]-[42].
Alternatively, an incentive payment may be unenforceable if the objective standard or agreed basis to measure the bonus is too uncertain: Placer v Development Ltd v The Commonwealth (1969) 121 CLR 353 at 356-7, 359-60.
The mere fact that a promise is discretionary in some respect does not necessarily mean that the obligation is non-contractual, or uncertain so as to be unenforceable. A promise is not too uncertain to be enforceable merely because it leaves one party a latitude of choice as to the manner in which agreed stipulations shall be carried into effect: Thornby v Goldberg (1964) 112 CLR 597 at 605.
A clause contemplating the payment of bonuses in future without specifying the relevant criteria to apply for future periods may nonetheless be enforceable. The criteria for assessment may be determined by the employer, or agreed by the parties, on a rolling basis for each new measure period: Walker v Andrew at [44]-[45].
Further, an employer may initially enjoy a discretion as to whether to pay a bonus or similar item, but then conduct itself so as to become bound to pay the relevant amount: O’Sullivan Partners (Advisory) Pty Ltd v Foggo [2012] NSWCA 40 at [57]-[58].
Implied Terms
Courts have implied terms in contracts in a number of ways, including: in fact or ad hoc to give business efficacy to a contract, by custom in particular classes of contract; in law in particular classes of contract; or, in law in all classes of contract: Commonwealth Bank of Australia v Barker [2014] HCA 32; 253 CLR 169 at [21] per French CJ, Bell and Keane JJ.
Specifically, in cases where a clause providing a bonus or commission is subject to a discretion (for example, by using words such as ‘entirely within the discretion of’), and the bonus is to be assessed against set objectives, a reasonable construction of the clause will not permit the Employer to choose arbitrarily, capriciously or unreasonably that it need not pay money where the set objectives have been satisfied: Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 (Silverbrook) at [5]-[6] and the numerous authorities there-cited.
In this way, such a clause might be described as including an implied term of reasonableness and good faith. Alternatively, the restriction on the employer’s discretion may be simply implied as a matter of construction of the express language of the clause. That appears to have been the approach taken by President Allsop (as his Honour then was), stating in Silverbrook (at [6]) that the discretion is to be exercised ‘honestly and conformably with the purposes of the contract’.
It is, of course, possible for an Employer to make the payment of a bonus or commission entirely gratuitous and voluntary, such that payment could be withheld capriciously, notwithstanding the compliance with solemnly set objectives. However, the words of such a clause would need to say so clearly: Silverbrook at [6].
This principle is similar to the principles set out in authorities decided in the United
Kingdom. These decisions set out, for example, that where the clause involves a discretionary bonus, there is an implied term that there will be a genuine and rational exercise of the discretion: Horkulak v Cantor Fitgerald International [2005] ICR 402; [2004] EWCA Civ 1287 at [46]-[72].
Issues 1 and 2: Did the Employment Agreement create a contractual obligation to pay an incentive?
The terms of the Employment Agreement
The Employment Agreement initially signed by Ms Subasic included the following:
Total Remuneration
You will be paid a Total Remuneration (TR) amount of $130,000 pa as set out in the attached TR Advice.
Your TR amount includes, the payments and benefits set out in HP’s General Terms and Conditions of Employment, but does not include any applicable profit share, employee share plan and other benefits.
In addition to that base salary, the Employer invited Ms Subasic to participate in the Employer’s Base Plus Program (or its successor programs), which was an incentive payment program. The Employment Agreement provided as follows:
Target Incentive Amount
You are also invited to participate in our Base Plus Program that includes a Target Incentive Amount (TIA) of $57,000 per annum in addition to your base pay. The Program and the TIA are subject to change or cancellation at Hewlett-Packard’s discretion and are aligned to market date research conducted from time to time by HP.
The Employment Agreement also attached several documents, namely:
TR Advice
General Terms and Conditions of Employment
Agreement Regarding Confidential Information and Proprietary Developments
Overview of HP’s Policies
Forms [included in the offer pack]
· Employee Personal Details
· Superannuation – Additional Contribution
· Employment Declaration
The TR Advice, as contained in the Employment Contract, stated:
Hewlett-Packard Australia Pty Ltd TR Advice SALARY COMPONENTS Effective Date 23 May 2005 Salary Range S06 Taxable Base Salary $114,550.06 Superannuation – Company Contributions $15,449.94 Total Remuneration $130,000 Target Incentive Amount (TIA)
$57,000
Sales Notional Salary (91.8% of [TR plus TIA])
$171,666
Among the General Terms and Conditions expressly stated in relation to the Employer’s policies were the following:
Your Total Remuneration has been set at a competitive market rate and as such includes all payments and benefits HP is legally obliged to make to you, … (including overtime, loading, allowances, superannuation as prescribed by law and Fringe Benefits Tax).
…
You agree to abide by any policies, procedures, practices and the criteria that govern any benefits that HP implements, as varied from time to time by HP at HP’s discretion. To the extent that the contents of policies, procedures, practices or benefits refer to obligations on HP, you agree that they are guides only and are not contractual terms, conditions or representations on which you rely.
[Emphasis added.]
The Employer relies on the words emphasised above.
The Base Plus Program was embodied in the ‘HP Global Sales Compensation Policy’. Included in that document was the following:
General Information
· This policy and HP Sales Plans are classified as “HP Restricted” and are meant for internal use only.
· Sales employees are expected to review this policy and referenced materials and discuss any questions with sales management.
· None of the contents in this policy, HP Sales Plans, nor regional sales compensation guidelines shall be construed to imply the creation or existence of a contract between HP and any participant, nor a guarantee of employment for any specified period of time.
· No Sales Plan participant will have any right to monies accrued through the plan until and unless all terms, provisions, and conditions, as set forth in this policy, the assigned Sales Plan and sales crediting process and procedures have been met.
· HP reserves the right to adjust Sales Plans as necessary to address changing business conditions or correct administrative error.
· HP reserves the right to change or discontinue this policy, with or without notice, at any time.
[Emphasis added.]
In 2007, the Employer changed the framework for paying its sales executives. Essentially, the Employer reduced the base salary amount to $112,000, but increased the at-risk component, being the TIA, to $74,800. Sales targets were set out periodically in sales letters issued by the Employer to Ms Subasic. Assuming
Ms Subasic met her sales targets, the overall amount paid to her in 2007 (base salary and TIA) did not change.
It is also relevant to note that as a result of the change in framework, a provision that had previously existed, which allowed the Employer to ‘cap’ commission payments, was removed. In a ‘Frequently Asked Questions’ document issued to Ms Subasic at the time, the Employer states:
HP has eliminated the use of pay plan caps under the new plan. However, there will be a management review process for exceptionally high performance.
The same document also included the following question and answer:
What advantages does the new compensation plan bring to sales employees?
It is simpler. There will be one accelerator per person, and the number of payout tables has been reduced from 48 to 4. Sales Representatives will be able to more easily calculate incentive compensation based upon their overall performance-to-date.
The new sales plan rewards strong sales performance. By moving more money into variable pay, which unlike base pay, can be multiplied by the accelerator, higher payouts are possible for over-performers.
[Emphasis added.]
The relevant Sales Letter for the Period was issued to Ms Subasic under the HP Global Sales Compensation Policy (Compensation Policy).
The Compensation Policy contained the following words:
…none of the contents of this Policy, HP Sales Plans, nor regional sales compensation guideline shall be construed to imply the creation or existence of a contract between HP and any participant, nor a guarantee of employment for any specified period of time.
No Sales Plan participant will have any right to monies accrued through the plan until and unless all terms, provisions, and conditions, as set forth in this policy, the assigned Sales Plan and sales accrediting process and procedures have been met.
The Sales Letter included the following:
…The purpose of this document is to communicate your Sales Plan, the business objectives and the parameters on which your incentive compensation calculation will be based.
…
Terms & Conditions
Your Sales Plan is governed by the following policies…
HP Global Sales Compensation Policy…
Sales employee will receive advance pay…when performance is 0-60% of quota.
Legal Info
To the extent allowed by law, the various components of your compensation are subject to change in accordance with the governing policies described above.
There are no oral agreements or other modifications concerning sales compensation between the sales employee and [the Employer] which are not contained or referenced herein. No modification of this Sales Letter shall be effective unless approved in writing by HP Sales Management and HP Sales Compensation Management.
…
This Sales Letter is considered accepted after 30 days unless you notify Hewlett-Packard otherwise. You represent that you have read, understood and agreed to the content and terms and conditions of your Sales Plan, including referenced policies, and that you have been made aware of the methodology Hewlett-Packard will use to calculate your incentive pay. …
HP has implemented a management review policy to evaluate sales performance significantly above target or for evaluation of credit for “large” deals. This evaluation does not include bonus, SPIF and Discretionary performance. This policy complies with HP’s Pay for Performance philosophy and is considered fair and equitable for both employees and the company. When a sales employee reaches an identified performance threshold, a management review occurs. As a result of these reviews, management may adjust various components of the employee’s Sales Plan, may hold incentive payments until review is complete, or may stop or recover unapproved payments to ensure fair measurement of performance.
[Emphasis added.]
The Sales Letter also contained the payout rates for the commission earned. For each additional 1% of the sales quota or target that Ms Subasic achieved, she would be paid an extra 2.5% of the TIA. The 2.5% was described as an ‘accelerator’; effectively a reward for top performance.
The proper construction of the Employment Agreement
Ms Subasic relies on the Letter of Offer (as varied in 2007). She says the Letter of Offer is to be read with, or varied by, the Sales Letters. She does not rely on any policy as giving rise to a contractual promise.
The TIA was included as a specific clause in the initial Letter of Offer. It was clearly a key part of the employee’s earnings, even though it was tied to performance. The TIA was referred to as a salary component in the TR Advice, as part of the ‘sales notional salary’. It is telling that the amount was also included for the purposes of calculating Ms Subasic’s superannuation.
Reading the clause in that context, the reasonable person would conclude that
Ms Subasic’s compensation for her work at the Employer had two components, a fixed component and an incentive payment component, payable as part of a participation in an incentive program.
What was the Employer contractually obliged to do with regard to the TIA by the words contained in the Employment Agreement? First, give Ms Subasic the opportunity to participate in the Program, or any successor incentive program. Second, if she participated according to the terms of the Program, and met the target, pay her $57,000 per annum, or whatever sum was payable under a successor program.
I do not accept the Employer’s argument that the words should be construed so that the Employment Agreement only included an obligation to invite Ms Subasic to participate in an incentive program, without any subsequent obligation to then pay the $57,000 sum if the employee took up the invitation and participated according to its terms.
The clause was contained in the Letter of Offer which constituted the primary document in the Employment Agreement in a high earning and competitive activity in which the payment of such incentives was part of the remuneration structure as indicated in both the Letter of Offer and the TR Advice. These are indicative of a contractual benefit to Ms Subasic and not merely a declaration of the Employer’s right to pay an incentive if it wished.
I also reject the Employer’s submission that because the TIA was separate to what was described as the ‘total remuneration’ figure (being the fixed component), the $57,000 sum was not part of the Employer’s original contractual obligations (relying on the words of the General Terms & Conditions set out and emphasised above at [50]). As submitted by Ms Subasic, the words about what the Employer was ‘legally obliged’ to pay were clearly for the purpose of expressly excluding benefits which might otherwise have arisen under entitlements that might be found outside the Letter of Offer, such as an industrial award, certified agreement or statute. That much is clear from the reference to items such as overtime, loadings and allowances. There is no express exclusion of the ‘legal obligation’ to pay an incentive payment properly earned in accordance with the employee’s participation in the Employer’s Program or successor program.
Further, the language of the clause is of an entitlement to $57,000 (initially), as of right, if Ms Subasic achieved her sales target. It was simply that the criteria for assessment as to when the TIA was payable (namely the sales target) was to be determined by the Employer, or agreed by the parties, and this later occurred on a rolling basis for each new measure period, through issuing periodic sales letters. At the relevant time, the criteria for assessment was the Sales Letter. Following Walker v Andrew, the incentive payment is enforceable as an entitlement.
The Sales Letter
The 2007 amendments did not fundamentally alter the Employment Agreement. Rather, the Sales Letter itself supports the construction of the incentive payment as a contractual entitlement. First, the language used is obligatory not discretionary. Examples include:
Sales employee will receive advance pay…when performance is 0-60% of quota.
…
You represent that …you have been made aware of the methodology Hewlett-Packard will use to calculate your incentive pay
Second, the language conveys an intention to create legal relations, such as:
There are no oral agreements or other modifications concerning sales compensation…which are not contained or referenced herein.
…
This Sales Letter is considered accepted after 30 days unless you notify Hewlett-Packard otherwise. You represent that you have read, understood and agreed to the content and terms and conditions of your Sales Plan, including referenced policies, and that you have been made aware of the methodology Hewlett-Packard will use to calculate your incentive pay.
The Sales Letter thus uses language to indicate that the parameters or criteria for incentive payments were solemnly set and governed the basis on which the Employer and Ms Subasic would proceed in terms of participating in an incentive program.
The Employer drew the Court’s attention to the Sales Letter as being a guide only, because it was issued under a policy (recalling the wording of the General Terms & Conditions set out at [50] above). The notion that the Sales Letter was only a guide is emphatically contradicted by the wording of the Sales Letter itself, to which reference has earlier been made in these reasons, at [68] and [69] above.
It is also contradicted by the Frequently Asked Questions document (part of the contemporary surrounding circumstances known to the parties when the Program was amended in 2007), which states that Sales Representatives will be able to more easily calculate incentive compensation. That could not be true if the Sales Letter was only a guide from which the Employer could freely depart.
However, even if the parameters may have been a ‘guide’, they were the parameters given by the Employer and the Employer paid Ms Subasic according to them. In that way, the Employer so conducted itself as to be bound by the criteria it had set. There were no other parameters for calculating the incentive payment. Further, in my view, the Employer did not change the parameters given to Ms Subasic in the Sales Letter. Rather, the Employer purported to introduce a cap once it was made aware of
Ms Subasic’s exceptionally strong sales performance. Even the cap was assessed by reference to the parameters in the Sales Letter.
The Employer’s discretion under the Letter of Offer
The Employer plainly did have discretion to change or cancel the Program or the TIA as per the terms of the Employment Agreement. The Employer changed the Program in 2007. At no stage did it cancel the Program or the TIA. (There was also a further discretion contained in the relevant policy, reflected in the emphasised words under ‘Legal Info’ in the sales letter extract above. The effect of that discretion is considered separately below under Issue 3.)
That there was a discretionary element to the existence of the Program or its amendment in the Letter of Offer does not negate the contractual obligation to pay an employee who participated in the Program, or its successor, according to whatever terms were set by the Employer. I consider it appropriate to applying similar reasoning to that set out in Silverbrook above, in that the discretion to change or amend the Program or the TIA was to be exercised ‘honestly and conformably with the purposes of the contract’.
Clear words would have been necessary before that clause in the Employment Agreement could be construed as allowing the Employer to introduce a cap and thereby refuse to pay an employee what it had promised to pay if the employee satisfied the criteria for performance set by the Employer in a policy. This is because to construe that clause as permitting such conduct would be to read the discretion referred to in the Employment Agreement as essentially unfettered.
Such a construction is also not to be preferred when it is recalled that the Employer unilaterally reduced the fixed component of Ms Subasic’s income when it introduced the uncapped incentive scheme with the opportunity for an accelerated incentive payment. An unfettered discretion would have completely deprived Ms Subasic of a very substantial benefit of the contract, including in part the payment of income that had previously been fixed and guaranteed.
In my view, the words in the General Terms and Conditions, referring to a benefit under a policy being a ‘guide only’ and not to be read as a ‘contractual term’, do not enable a construction that any payment of an incentive earned under the Program in its original form or as amended could be withheld entirely at the whim of the Employer.
On the contrary, a reasonable construction of the Employment Agreement was that the Employer was not permitted to decide arbitrarily, capriciously or unreasonably that it need not pay an incentive payment where the set objectives had been satisfied. To my mind, that is the proper construction of the express words of the Employment Agreement.
Further support for that construction is again seen in the Frequently Asked Questions document supplied to Ms Subasic when the Program was amended. It expressly told employees that the cap had been removed, and that higher payouts were possible for over-performers.
The implied term of good faith
If I am wrong as to that construction, I would have found that there was an implied term of good faith in the exercise of the discretion with regard to the incentive payment under the Program as amended, the content of which (ascertained by reference to the terms of the Employment Agreement) was that the Employer could not decide arbitrarily, capriciously or unreasonably that it need not pay an incentive payment where the set objectives had been satisfied. It arises to give business or commercial efficacy to the particular clause of the contract. It would defeat the commercial purpose of the clause if it were construed as permitting the Employer to introduce an incentive program, expressly remove a cap on incentive payments, market the program as rewarding strong performance, and then when employees performed strongly, exercise its discretion to refuse to pay the incentive specified.
The Employer argued that any implied term of good faith in the exercise of the discretion did not deprive the Employer from having regard only to its own legitimate interests, relying on Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; 69 NSWLR 558 at 573. That may be so, but the interest must be legitimate, and within the ambit of the contract. Absent clear words indicating that the parties had agreed otherwise, a contract which provides for the payment of an incentive tied to performance but with a discretion to amend the Program must include an obligation on the Employer to act in good faith and actually pay the incentive if an employee achieves the target set.
A case with marked similarity to the present facts is GX Networks, where the claimant was a sales manager in the broadband industry. In 2007 the structure under which she was paid commission was revised. The amendment provided for the employee claimant to achieve a higher multiplier of her salary for sales achieved over an agreed target, which could be revised quarterly. The claimant exceeded her target by 205% and was due commission of £163,000. Instead of revising the target and without notice to the claimant, the employer introduced a cap, which it claimed it was entitled to do in exceptional circumstances.
At [11], the appeal court recorded the reasoning of the primary judge:
It is not an appropriate exercise of discretion in those circumstances to say that we will impose the cap because the money, which the rules and regulations for commission indicate the claimant will get, amounts to a sum considerably more than we want to pay. I cannot myself accept that that is a relevant factor for the exercise of a discretion. The circumstances are that the target, it seems, was too low but they are responsible for their targets. The defendant company cannot use money which would otherwise be the claimant's to get themselves out of a hole which they have got themselves in.
The appeal court (with the primary judgment delivered by Smith LJ) adopted slightly different reasoning, holding that the capping provision was not an unfettered discretion, and could only be applied in exceptional circumstances. Smith LJ went on to conclude that there were no exceptional circumstances. In the course of that reasoning, Smith LJ stated at [22]:
Within a scheme which is designed to encourage and reward effort and success it cannot be envisaged that an unusual degree of success should be treated as… exceptional circumstances justifying the capping of the very reward which was being offered.
There was no argument here of any entitlement to cap a payment in exceptional circumstances and the Employer seeks to further distinguish GX Networks on the basis that in the present case, if there was a promise to pay, there was also a promise to review when certain performance triggers were reached.
However, as will be seen from the reasons that follow, I do not accept the Employer’s construction of what the MIPR process permitted it to do. In my view, Ms Subasic’s case is almost identical in the key facts, in that she also achieved an unusual degree of success under the incentive Program. The Employer may have underestimated the market in setting Ms Subasic’s target, but the Employer was responsible for setting the targets. Moreover, Ms Subasic achieved sales far in excess of what the Employer was expecting. That was actually a good thing for the Employer. If the Employer then has to share part of the money made with the employee who did the work to get the sales, that is the very essence of an incentive program that rewards strong performance.
Issue 3: Was the incentive payment subject to the Employer’s approval or other limitations?
This issue relates to a further discretion contained in the Management Incentive Performance Review (MIPR) process which was referred to in the Compensation Policy and again in the Sales Letter.
Section 10.0 of the Compensation Policy provided:
HP has implemented a management review policy to evaluate sales performance significantly above target …This policy complies with HP’s Pay for Performance philosophy and is considered fair and equitable for both employees and the company. When a sales employee reaches an identified performance threshold, a management review occurs. As a result of these reviews, management may adjust various components of the employee’s Sales Plan, may hold incentive payments until review is complete, or may recover unapproved payments to ensure fair measurement of performance. …
The region and country business group sales management organizations are responsible for conducting reviews and providing approvals once an employee’s attainment reaches 250% TIA attainment …
The relevant part of the Sales Letter is emphasised under ‘Legal Info’ in [58] above. The key words are:
As a result of these reviews, management may adjust various components of the employee’s Sales Plan, may hold incentive payments until review is complete, or may stop or recover unapproved payments to ensure fair measurement of performance.
There is no dispute between the parties that Ms Subasic achieving sales of 250% TIA might trigger a review. However, the parties disagree as to the extent of the discretion on review.
Ms Subasic argues that only certain, stipulated action could be taken as a result of a review, namely:
(i) The adjustment of various components of the Sales Plan;
(ii) The holding of incentive payments until review is complete; or
(iii) The recovery of unapproved payments to ensure fair measure of performance.
In oral submissions, Senior Counsel for Ms Subasic also referred to a fourth option, being to do nothing. It was submitted that none of those options create a power to cap payments, or to do so retrospectively. There was similarly no power within the discretion to retrospectively alter previous quota or other parameters. The same reasoning applies to the exercise of any discretion under the MIPR (the wording is the same as that contained in the Sales Letter).
Those submissions should be accepted as being the appropriate construction based on the express wording of the discretion. Again, and applying the reasoning set out above, clear words would have been necessary before the provision would be construed as permitting the Employer to retrospectively cap a payment on review.
The provision is aimed at giving the Employer an opportunity to respond to the market and to ensure that the sales were fairly made. The Employer plainly had the discretion to revisit the various components of an employee’s Sale’s Plan prospectively. However, there is nothing in the words of the Sales Letter or the MIPR from which to infer any intention that the Employer retained a discretion permitting it to cap a fairly earned payment after the employee had done the work to earn it.
The reference to certain management groups providing approval once the 250% threshold is met is to be read not as an approval at large, but rather as an approval following the review, and therefore as an approval following satisfaction that the incentive payment was the fair measure of the employee’s performance, in the sense it was properly earned – that there was nothing untoward in the sales negotiations.
Even if I had found that the discretion did permit capping of the incentive payment, I would have also found that the discretion must not be exercised in a capricious manner. The only document that could shed any light on the issue records that a decision to cap Ms Subasic’s commission was made by a person named Adrian Jones. The document also records that all the other employees who achieved more than 350% of their TIA for that quarter would also not be paid any further commission.
Mr Jones was not called to give evidence to explain that decision. At the time of the hearing, he was no longer in the employ of the Employer. However, there was no evidence explaining any attempts made to contact him or otherwise explain the basis for the decision. On the evidence before the Court, there was nothing to suggest that the Employer had any valid reason for capping Ms Subasic’s payment apart from the fact that it simply did not want to pay such a large sum. That is the inference I’ve drawn from the document.
Issue 4: Is the Employer estopped from denying that the uncapped amount is payable?
It is unnecessary to determine this issue in light of the findings above. Some brief findings may be useful in the event that the above reasoning is later found to be wrong.
The general principles as to when an equitable estoppel will arise are as follows (see Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (Waltons Stores) at 428:
(a) The plaintiff must have assumed a particular state of legal affairs;
(b) The defendant must have induced the plaintiff to adopt that assumption or expectation;
(c) The plaintiff must have acted in reliance and to their detriment on that assumption or expectation;
(d) The defendant must have known or intended the plaintiff to rely on the assumption or expectation;
(e) The defendant must have failed to act to avoid the detriment.
A common law estoppel by representation similarly arises when there is reliance on a representation: see Waltons Stores per Gaudron J at 463-4.The practical difference is the different remedies they support, but it is unnecessary to consider this further due to the findings below.
The plaintiff pleaded the estoppel based on certain conversations she had with her manager, Mr Raymond Maisano. It is alleged that in March 2010, Mr Maisano told her she did not need to worry about not receiving commissions for the month of March 2010 and that the commissions would be paid the following month. Then in April 2010, Mr Maisano told Ms Subasic that her commission was not being capped. For the purposes of giving these brief reasons on this issue, I have presumed without deciding that the representations occurred as Ms Subasic has pleaded.
Ms Subasic claims that she brought forward as much business as possible into the relevant quarter, such business would otherwise have been recorded for incentive payment purposes in the following financial period.
The key difficulty for establishing an estoppel based on the said statements is reliance. The unchallenged evidence was that by the end of March 2010, Ms Subasic had already achieved more than 350% of her sales quota. Indeed, the cumulative sales achievement reported on the Omega computer program by the end of February 2010 (at the accelerated rate once the TIA had been achieved) was 588% of the TIA value.
Thus, by the time Mr Maisano communicated with Ms Subasic in March, she had already met and well exceeded her sales quota. I would not have been satisfied that Ms Subasic’s subsequent sales conduct was due to anything Mr Maisano said.
Ms Subasic would have effectively had to sell nothing in order to count the sales made in March and April 2010 (after the conversations) that were above the 350% cap towards a later period. I accept the Employer’s submission that doing nothing or holding back sales would have been contrary to her obligations as a sales representative.
Further, Mr Maisano was not the ultimate decision-maker with respect to Ms Subasic’s commission, and this was known by Ms Subasic – the chain of managers was set out in the MIPR process. He was at best expressing his understanding at the time of what was going on at a level higher up than himself, not representing to Ms Subasic a conclusive position on behalf of the Employer.
It seems to me that what Ms Subasic actually relied upon in making the sales she did was the Sales Letter issued in December and the Employer’s policies as to how commission would be calculated, as well as the express deletion of any provision capping commission when the Program was changed in 2007. However, that was not the estoppel case pleaded.
There are also difficulties with the evidence as to detriment. There was no evidence as to what occurred in relation to the setting of targets and sales performance or the payment of commissions in respect of the following period, so as to establish what detriment was suffered or would be suffered if the Employer were to be permitted to act contrary to statements made by Mr Maisano.
I would not have been satisfied that any estoppel (equitable or common law) had arisen based on any conduct of Mr Maisano.
Issue 5: Loss
In light of the findings above, the Employer has breached the Employment Agreement. Ms Subasic is entitled to damages in the sum of the benefit she would have received had the contract been performed according to its terms.
The Employer submits that the Court should apply the ‘least burdensome principle’, summarised in Port Macquarie-Hastings Council v Diveva Pty Limited [2017] NSWCA 97 by Payne JA, with whom Beazley A/CJ and Simpson JA agreed at [82]:
A defendant to proceedings to recover damages for breach of contract has the right under the contract to alternate methods of performance; it should be assumed that the contract will be performed in the way most advantageous to the defendant: The Mihalis Angelos. At least one important qualification to that principle is that when the facts available to the court, up to the date of the trial, demonstrate that the defendant would not (leaving to one side the circumstances of the breach of contract which has been found) have acted so as to perform the contract in that more advantageous way, the natural inference that the defendant would be understood to do so for the purposes of the damages calculation does not arise: TCN Channel 9 v Hayden Enterprises at 150, 156 and 163. As Deane J explained in Amann Aviation at 133:
The "rule" recognized in cases such as The Mihalis Angelos does not require an assumption that, after full performance of a contract, the defaulting party would have acted against his own interests and obligations by, for example, declining to accept the most favourable tender for a further contract. It is no more an answer to Amann's claims to say that the Commonwealth might, at the end of the day, have arbitrarily refused to deal with Amann than was the possibility that the defendant might have arbitrarily refused to give the plaintiff a prize in answer to the claim in Chaplin v. Hicks or the possibility that the defendant might have acted unreasonably in answer to the plaintiffs' claim in Abrahams v. Herbert Reiach Ltd...
[Citations omitted.]
The Employer submits that on the counterfactual, had it performed the Employment Agreement according to its terms, it should be assumed that it would have conducted a management review in accordance with the MIPR process once Ms Subasic’s performance reached 250% of TIA (that is, at an earlier time in the quarter). At that point, the Employer would have brought about a result identical to the effect of the management review that occurred.
That submission is defeated for two reasons. The first is that it is based on the Employer’s construction of the MIPR as allowing it a discretion to cap the commission (or not approve the payment) as it saw fit. I have rejected that construction. The second is that it was not the Employer’s practice to review the performance of its employees until the conclusion of the quarter. That was what emerged from the evidence of both the agents of the Employer who were cross-examined. As Payne JA makes clear in the above extract of the NSW Court of Appeal, the application of the ‘least burdensome principle’ does not go so far as to displace the evidence in the case that is relevant to a counterfactual of what would have occurred.
On either of the alternative claims in contract, Ms Subasic is entitled to the $309,750.39 amount claimed, as I accept the submission that the Employer’s reasonable exercise of any discretion under the Employment Agreement would have resulted in the payment of incentives to Ms Subasic on an uncapped basis and as calculated by reference to the parameters set in the Sales Letter.
Relief
Ms Subasic is also entitled to interest pursuant to r 1619 of the Court Procedures Rules 2006 (ACT)(Rules) which will be calculated according to the rates set out in clause 2.1 of Sch 2 to the Rules.
The awarding of interest is discretionary. I consider the appropriate date from which interest ought to accrue is the commencement of the proceedings (17 June 2016), which I have taken as the formal demand for payment of the outstanding commission. On one view, that may also be when the cause of action based on the non-payment of a debt crystallised.
The alternative view is that the cause of action arose in 2010, when Ms Subasic was notified that no further payment of commission would be forthcoming. There was no fixed time by which the Employer should have paid the incentive payment. A reasonable time for the payment of the outstanding commission to have been made would have been in 2010. However, Ms Subasic did not make any formal demand for the payment of the incentive payment while she was employed with the Employer. There were then some years before Ms Subasic brought the claim. I accept that there was no issue of waiver pleaded by the Employer and Ms Subasic submitted that she did not want to sour the employment relationship in bringing proceedings while she remained an employee. While that may be understandable, the consequence was that the Employer was unaware that Ms Subasic did not accept the capping of the payment was lawful or remained in dispute years after she resigned.
The substantial delay in bringing proceedings would operate unfairly against the Employer if it were required to pay interest from 2010, when it was not on notice that there was any outstanding issue. Parties are to be encouraged to litigate known disputes in a timely fashion. In this case, I consider the just course is for the payment of interest to accrue from the date the proceedings commenced.
In relation to costs, there is presently no reason to depart from the usual course that costs ought follow the event. I will allow the parties 7 days’ notice to notify the Court if a different order on the question of costs is sought.
Orders of the Court
Accordingly, the orders of the Court are as follows:
(1) Judgment for the plaintiff in the sum of $309,750.39 plus interest in the sum of $61,568.19.
(2) The Defendant is to pay the plaintiff’s costs.
(3) Order 2 is stayed for 7 days.
| I certify that the preceding one-hundred-and-eighteen [118] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam. Associate: Date: 30 January 2020 |
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