Can Employers Withhold Employees' Salaries For Failing To Meet KPIs? Key Lessons From Mrs. Iyeyinka Olayanju -v- Global Mercantile And Corporate Logistics Ltd (Judgment Delivered On Thursday, 6 February 2025)

Introduction

Most employers set specific Key Performance Indicators (KPIs) for their employees, and these KPIs help the employer assess the employee's performance over a given period.

Employees who consistently fail to meet the minimum pass mark in their KPI may lose their jobs due to poor performance. However, a growing practice among some Nigerian employers is to withhold salaries, or portions of them, when employees fail to meet KPI targets.

In Mrs. Iyeyinka Olayanju -v- Global Mercantile and Corporate Logistics Ltd (Unreported) (Suit No: NICN/LA/507/2018 judgment delivered by Hon. Justice (Prof) Elizabeth A. Oji), on Thursday, 6 February 2025, the National Industrial Court of Nigeria (NICN) had the opportunity to make a pronouncement on whether an employer could rely on an employee's failure to meet their KPI as a valid basis for refusing to pay their salary.

Summary of the Facts of Mrs. Iyeyinka Olayanju -v- Global Mercantile and Corporate Logistics Ltd

The Claimant, a former Chief Operating Officer of a subsidiary of the Defendant, filed a lawsuit at the NICN to challenge her employer's authority to withhold earned salaries and emoluments on the pretext of non-performance of Key Performance Indicators (KPIs) and financial difficulties. She also argued that the Defendant's failure to pay her salary for over five months amounted to constructive dismissal and that she was under no obligation to give a contractual notice for the termination of her employment.

The Claimant's core argument was that the non-payment of her salaries and allowances in the sum of N17,830,000.00 (Seventeen million, eight hundred and thirty thousand naira) constituted a fundamental breach of her employment contract. This challenge arose after the Defendant refused to pay the Claimant's full salary for April 2018 and the total salaries for May through September 2018, citing her failure to meet specific performance targets.

The Defendant contended that its failure to pay the Claimant's outstanding salaries was because the Claimant's entitlement to be paid was "contingent upon meeting specific performance indicators (KPIs) outlined in the contract and by the approval of the board meeting". The Defendant further asserted that the Claimant failed to meet these KPIs, plunging the company into financial crisis. In canvassing its position, the Defendant relied on clause 4.2 of the Claimant's Contract of Employment, which provides as follows:

"Notwithstanding anything to the contrary contained herein (i.e. in the contract of employment) where in any financial year during the currency of the tenure of the Chief of Operating Officer, the Company makes no profits or its profits are below projected forecast for that year, the Company will only pay the Chief Operating Officer remuneration by way of Salary, Benefits, Perquisites and Allowances as specified above. No Bonus Remuneration or any kind of commission shall be payable."

Summary of the NICN's Judgment

The Court rejected the Defendant's argument and held that, based on the terms of the Contract of Employment, the Defendant had no right to withhold the Claimant's salary for her failure to meet her KPIs. The Court found that clause 4.2 of the Contract of Employment did not make the Claimant's salary contingent on KPI performance. Hon. Justice (Prof) Elizabeth A. Oji, at Page 12, Paragraph 31 of the judgment held as follows:

"Payment of salaries and wages to employees is as essential as basic necessities to a human being and no employer can deny same. This is why the duty to pay remuneration is taken for granted, and implied into every contract of employment. Once an employer accepts service from an employee, the employer owes the primary duty of payment for such service. The Defendant has breached this sacred duty, and has not justified the breach, either by reference to the conduct of the Claimant, or by its policies. I therefore find and declare that the Defendant's non-payment of the Claimant's salaries and emoluments is a fundamental breach of the Claimant's Employment Contract."

Regarding the Claimant's argument on constructive dismissal, the Court held that the Claimant was unable to establish how the Defendant's conduct led to her resignation, as she could not claim that she was constructively dismissed because she decided to continue to stay in the Defendant's employment for over five months after her salary was withheld. Hon. Justice (Prof) Elizabeth A. Oji, at Page 14, Paragraph 36 of the judgment held as follows:

"I am of the opinion that the Claimant has not led evidence to show such conduct of the Defendant that led to her resignation. In exhibit C2, she referred to consistent material breach as the reason for her resignation. Claimant had been owed salary for over five months, and stayed back and opted to give one month notice of her resignation. The Claimant is bound to give the requisite notice as stated in her contract of employment; and not to adjust it unilaterally. The argument on constructive dismissal thus fails."

The Court's position on constructive dismissal suggests that employees who believe they have been constructively dismissed due to non-payment of salary should act promptly, as continuing to work for an extended period may be seen as accepting the breach.

Key Takeaways from the NICN's Judgment in Mrs. Iyeyinka Olayanju -v- Global Mercantile and Corporate Logistics Ltd

The following are the key takeaways deducible from the NICN's judgment:

1. An employer cannot rely on an employee's failure to meet their KPIs as a ground for withholding the employee's salary.
2. An employee cannot establish a claim for constructive dismissal if the evidence shows they continued to work for some months after their salary was withheld.
3. An employee's contractual duty to give the appropriate notice period for their resignation would continue even if the employer owed the employee unpaid salary.
4. An employee cannot unilaterally reduce their notice period for resignation on the grounds that their employer owes them unpaid salary.
5. Employers must clearly distinguish between "basic salary," which cannot be withheld based on KPI performance and "performance bonuses," which may be contingent on meeting KPIs. Therefore, the employment contract must explicitly state if any portion of an employee's remuneration is based on performance.

Conclusion

This case stands as a salient reminder of the critical importance of distinguishing between "bonus", which may be discretionary and performance-based, and "basic salary," which is a contractual right when addressing the issue of KPIs.

Employers who wish to link compensation to performance must explicitly state in the contract of employment if any portion of an employee's remuneration is based on performance. Without this clear separation, employers risk being found in breach of contract and liable for damages if they withhold any portion of an employee's salary based on KPI performance.

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