A recent ERA determination highlights the dangers of ambiguity regarding the calculation of bonus payments. What went wrong for this Auckland company?
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Auckland textiles company, C-Force, was recently ordered to pay its ex-employee just over $185,000 by the Employment Relations Authority (ERA). The sum was to cover bonus payments that C-Force failed to pay between July 2008 and October 2011.
In reaching her conclusion, ERA member Rachel Larmer had to consider several key issues, including: whether the bonus payments claimed by the ex-employee were based on personal sales or the company’s sales, whether he had already been paid his full entitlements, and whether he was estopped from claiming them.
Larmer first considered the question of how the bonus payments were calculated and referred to the relevant clause of the ex-employee’s contract. “In addition to the salary and entitlements, the employee shall be paid an annual bonus calculated at the rate of 2% of annual gross sales in excess of $2 million,” it read.
Larmer stated that the clause failed to stipulate whether the bonus payments should be based on the ex-employee’s personal sales or on the total company sales and proceeded to refer to the context of the parties’ contractual agreement for clarification. “Extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning the words used in the bonus clause were intended to bear by the parties,” she explained.
She observed that throughout the employee’s tenure, until the payments stopped in 2008, the bonuses had been calculated according to total company sales. “I do not accept C-Force’s submission that it would not make sense for it to base (the employee’s) bonus payments on a percentage of total company sales, over which he had no involvement…because that is in fact exactly what it had been doing since it first entered into a bonus structure with [him],” she concluded.
Having decided how the bonus payments should have been calculated, Larmer proceeded to consider whether the ex-employee could be estopped from claiming them. “For such an estoppel to occur there must generally be a clear promise or representation, although it does not need to be express,” she said. However, C-Force could produce no evidence to show that it had acted, to its detriment, in reliance upon any assurance from its employee. As a result, there could be no estoppel. In addition, the employee had six years to pursue his claim, which hadn’t expired.
C-Force’s counterclaim for over $250,000, it claimed, had been incorrectly paid to the employee also failed.
