A supplier recently raised a concern which, though presented as a commercial grievance, raises a host of legal issues. His competitors, it claims, are offering incentives directly to retailer customer-facing staff — Amazon vouchers, electronics, and even top-up cards that function as prepaid credit cards — in exchange for pushing their brands over others stocked by the retailer. These rewards, it contends, are calculated based on turnover. On the face of it, this may appear to be a clever sales strategy. But a deeper consideration reveals a legal minefield stretching across several areas of law: contract, bribery, employment, taxation, and competition.
At its core, this practice presents a fundamental question of contractual relationships. By this arrangement, is the supplier contracting with the retailer or directly with the individual employees of the retailer?
If the arrangement is with the retailer, then any incentives given to employees ought to be authorised by the retailer, ideally recorded in a formal agreement or recognised in the retailer’s policies.
If, however, the supplier is engaging directly with the individual employees, then questions of authority arise. Do these individuals have the actual or apparent authority to enter into such agreements? The law of agency tells us that apparent authority can bind an employer where a representation has been made. But in the absence of clear authority or disclosure to the employer, such dealings are vulnerable to challenge, both legally and ethically.
The scenario quickly becomes murkier when looked at through the lens of the Bribery Act 2010. This Act (which gives the UK one of the toughest anti-bribery regimes in the world) criminalises the giving or receiving of bribes. A supplier offering financial or other rewards to induce a retailer’s employees to promote the supplier’s products might be committing an offence under the Act of bribing another person. On the flip side, the employee who accepts the incentive could also be exposed under the Bribery Act. Further still, it is a corporate offence under the Act if the retailer fails to prevent bribery.
The critical test under the Bribery Act is whether the payment or reward is made with the intention of inducing “improper performance” of a relevant function. In the case of customer-facing staff, promoting one brand over another in return for undisclosed personal gain, especially where this is contrary to their employer’s expectations or detrimental to customers, may well be improper. This issue came under the spotlight in a case in 2018 where a small office interior business was prosecuted for failing to prevent bribery, despite having a basic compliance system in place. The lesson there is stark: size and good intentions are no defence.
Some may argue that such incentives are simply promotional, part and parcel of aggressive marketing. Yet this is not a carte blanche. While corporate hospitality can be acceptable, covert turnover-based rewards, especially where they go undeclared and unmonitored, cross into much more dangerous territory. The Serious Fraud Office and HM Revenue & Customs have both signalled their willingness to scrutinise these kinds of practices.
Then comes the question of employment law. Employees owe their employer a duty of fidelity and good faith. When staff accept incentives or commissions from suppliers without disclosing them, they risk breaching that duty. In one well-known case, an employee who secretly accepted commissions was not only dismissed but ordered to return past earnings. Today’s retailer may not pursue quite so draconian a remedy (unless the employee is a director or senior individual owing fiduciary duties), but there is no doubt that such conduct could amount to gross misconduct, justifying summary dismissal.
Employers have every right to expect their staff to act in the best interests of the business. If employees are covertly accepting rewards that affect their recommendations to customers or internal ordering practices, the consequences can be severe. Retailers should therefore ensure that they have clear, written policies on conflicts of interest and the acceptance of gifts. Where these are absent, they leave themselves open to internal disarray and potential legal disputes.
Nor can the tax implications be ignored. HMRC treats rewards such as vouchers, electronics, or pre-paid cards as taxable benefits. Under the law they are treated as employment income and are subject to income tax and potentially National Insurance. If a supplier provides such a benefit directly to an employee of the retailer, and it arises by reason of that individual’s employment, then tax may be due. PAYE obligations may be triggered for the supplier, and potentially for the retailer, particularly if the incentive is deemed to be connected to employment rather than being a pure marketing promotion. HMRC has long taken the view that even small-value incentives are taxable if they are linked to employment duties.
For suppliers, the danger lies in inadvertently becoming a shadow employer, with obligations to report and deduct tax. For retailers, there is the added risk that the reward could be recharacterised as part of the employee’s pay package — with knock-on implications for PAYE and employer compliance. And for the employee, failing to declare such income could bring unpleasant enquiries from HMRC.
Finally, competition law. Where incentives are structured to reward staff for recommending one brand over another, this can distort normal competitive dynamics. Both UK and EU competition law prohibit agreements or concerted practices which have as their object or effect the restriction or distortion of competition. While the scale and effect of the incentives will be key, a supplier that, through such schemes, succeeds in freezing out rivals or manipulating showroom presentation could find itself under scrutiny. If such scrutiny reveals an infringement of competition law, businesses which have suffered loss as a result of the infringement can claim damages against the infringer.
In short, what may appear at first blush to be a clever way of promoting a product can, when considered through the lens of English law, be fraught with difficulty. The practice of rewarding the employees of a retailer for pushing a brand may touch upon breaches of contract, employment law violations, criminal bribery, tax non-compliance, and anti-competitive conduct — sometimes simultaneously.
The safest course for both suppliers and retailers is transparency. All parties should review their contracts and internal policies to ensure that any incentive schemes are properly authorised, disclosed, and documented. Clear protocols should be adopted, and advice sought, before engaging in reward practices — particularly those tied to sales performance.
The commercial world will always chase market advantage. But where that advantage is sought through concealed incentives and informal rewards, the risks — legal, financial, and reputational — are simply too high to ignore.
This article was written by BLCC member, Fox Williams LLP, with insights from their commercial and employment law specialists.