Six-figure payout awarded to employee over contested incentive scheme

Often the most disputed aspects of an employment contract are the ones that receive the least attention. The Federal Court’s decision in HealthX Group Pty Ltd v the Palling (No 2)[2025] FCA 1300 may well fit this description.

The case concerned an employment contract that contained a schedule with an item which provided for a profit share, but which was not otherwise linked in any way to a provision of the employment contract. Item 10 of the schedule stated:

“Profit share: All General Managers will participate in a profit share arrangement that will see achievable opportunity to receive a significant share in their Channel’s Profit. The General Manager HealthX will access a profit share in the amount of 5% of the gross contribution (GC)(EBIT [Earnings Before interests Tax] for the business unit before shared services cost).

The gates needed to be met to allow the profit share to flow are:

1.           Top line revenue growth

2.           Increased profitability

… ”

As the dispute reached the Federal Court, the key question was how item 10 of the schedule to the employment contract should be interpreted. In particular, the question was whether it was discretionary or an entitlement. HealthX argued that the provision was discretionary, while Ms Palling argued that item 10 established an entitlement.

In essence, HealthX argued that the intention was for the clause to operate like a bonus, which is typically discretionary. The Court rejected this argument and noted the following:

• there was no reference to item 10 of the schedule in the main clauses of the employment contract, but this did not prevent it from having contractual force.
• item 10 of the schedule referred to a profit share, not a bonus. While a bonus could well be understood to be discretionary, a share in the profits of a business creates an expectation on the part of the employee that, if the business makes a profit and the established criteria are met, the employee will be contractually entitled to the specified share
• the wording of item 10 of the schedule was clear on the amount Ms Palling would be entitled to receive
• while the word ‘access’ could generally suggest the existence of a discretion in the context used, the use of the word ‘access’ in  verb form in item 10 did not support the proposition that the payment was discretionary
• language in item 10, such as ‘will’, did not support an interpretation that any payment was discretionary. Rather, once the relevant ‘gates’ had been opened, there was a direct entitlement to payment
• because the language of the clause was not ambiguous, it was impermissible to have recourse to the surrounding circumstances and other practices for the purposes of interpreting item 10. 

Once it addressed the proper interpretation of item 10 of the schedule to the employment contract, the Court then looked at the evidence to support whether the relevant ‘gates’ had been met and determined, despite the inadequacy of the evidence, that they had been. 

On this basis, the Court awarded Ms Palling 5% of the actual EBITA for HealthX for each relevant quarter, totalling $366,405.20. In reaching this decision, the Court observed that any documents to assist in determining these matters were within the control of HealthX, and it had failed to produce these and establish its case. Further, the Court observed that HealthX failed to call certain witnesses who could have provided evidence on these matters and drew an inference from HealthX’s decision not to call these witnesses that they would have given evidence which would not have been of assistance to HealthX on this issue. 

Key lessons for employers

This case highlights a number of practical challenges that often arise with incentive arrangements for employees. There is often a difference between the commercial intent and the actual wording used to capture that intent, especially when contracts are drafted at the last minute and in attempt to attract the employee to enter the contract. This context can generate significant errors and disputes between the parties, particularly if the employment ends under difficult circumstances.

Incentive arrangements can also be drafted relative to a specific point-in-time, where changes to the employer’s business operations, or to the role of the employee, results in unexpected (and often contested) outcomes.

This decision is a reminder that courts will look to uphold the bargain and will treat an employment contract like any other commercial contract when interpretating the terms. For employers, it is important to ensure that practices around variable pay, bonuses or any other form of payment are consistent with the actual wording used in the relevant employment contract. If the language used does not reflect the reality of the sums that may be payable, it can expose the employer to significant financial risk.

If you have any questions about this article or need legal assistance with your business’ employment contracts or incentive schemes, please contact us here.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Stephen Trew

Michael Hope

Share this