Discretionary bonuses

Many employers operate discretionary bonus schemes. In legal terms, it is
often exactly where the discretion lies which can prove problematic. There are
often problems in two areas: first, the express terms of the scheme and whether
or not a "true" discretion has been retained by the employer and,
second, the legal context in which the discretion can be exercised, which is
much narrower than some managers might believe.

Express terms

An employer should always look to retain flexibility where a discretionary
bonus scheme is introduced. A discretion to vary the terms of the bonus scheme
in contractual documentation is useful. It is also advantageous practically to
make it clear what happens to employees who either leave the relevant
department, or the employer altogether, part-way through a financial year.

Since bonuses of this sort are usually offered to enhance loyalty, the
employer will normally be looking to avoid any obligation to make a pro rata
payment in these circumstances. An express provision indicating that this is
the case is helpful. Many employers go further and make it clear that the
recipient also has to be still in employment, without notice having been given
on either side, at the date of payment – which can be some time after the
actual end of the financial year – to remain eligible.

Implied terms

A discretionary bonus scheme may not be as discretionary as management would
like to think. Many employers actively encourage a culture where managerial
discretion is a reality. But in paying bonuses, as in other things, managers
need to be made aware of the legal context in which they are operating.

One issue which can arise is a claim that less favourable treatment is being
given to employees of different sexes or races. Any disparity in treatment,
without an obvious reason for it, runs the risk that an employment tribunal
could draw an inference that discrimination may be taking place.

Furthermore, due to a recent High Court decision concerning Nomura
International, the exact extent of an employer’s discretion is limited. Here,
the bonus decision did not appear to be consistent with the individual’s
performance. The individual pursued the employer in the High Court and won, on
the grounds that the decision of the employer was an irrational and/or perverse
exercise of discretion.

The moral is clear: when making decisions about bonuses, even in a
discretionary context, managers will have to be able to justify their decisions
with reference to credible business arguments. The same criteria should be used
in relation to all eligible employees. To do otherwise means risking
litigation.

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