Discretionary bonuses: Small and others v Boots – case of the week

Discretionary bonuses should be paid by Boots

Small and others v (1) Boots Company plc (2) Boots UK Ltd

FACTS Mr C Small and other warehousemen were employed by Boots in two warehouses near Nottingham. The claimants employed in one warehouse transferred to Unipart in August 2003 and those employed in the other transferred in April 2004. Both transfers were covered by TUPE 1981. In April 2007, the warehouse undertakings were transferred back to Boots, under TUPE 2006.

Before the transfers from Boots to Unipart, the claimants had received performance-related bonuses. However, while employed by Unipart, they received no bonuses for 2005, 2006 and 2007. The warehousemen who continued to be employed by Boots did receive bonuses.

Small and the other claimants brought an employment tribunal claim for unlawful deductions from wages, on the basis that they had not been paid the bonuses to which they were contractually entitled. The tribunal held that the claimants did not have a contractual entitlement to the bonuses, whether during their employment with Boots, on their transfer to Unipart, or on their re-engagement by Boots. The basis of the decision was that much of the relevant documentation was couched in the language of discretion rather than obligation, which meant the bonus scheme did not have contractual effect.

The claimants appealed.

DECISION The Employment Appeal Tribunal (EAT) upheld the appeal, remitting the case to a different tribunal to determine whether the bonus scheme had contractual effect. In particular, the EAT held that labelling a bonus scheme as discretionary does not of itself mean that it does not have contractual effect.

In practice, the word discretionary in the context of bonus schemes can relate to a number of factors, including the decision to pay the bonus, how to calculate it or the amount.

It also found that the tribunal should have taken account of all the relevant circumstances, including Boots’ invariable practice of making bonus payments over many years, in deciding whether the discretion was to be construed as having contractual effect.

Further, in line with existing case law, the tribunal should have considered whether, in exercising its discretion, and not paying bonuses, Boots had acted rationally and in good faith.

IMPLICATIONS This case serves as a useful reminder to employers that simply describing a bonus scheme as discretionary does not give the employer carte blanche to pay a nil (or unexpectedly small) bonus.

Bonus schemes often contain discretion elements while being contractually enforceable. In such circumstances, the employer must exercise any discretion rationally and in good faith. This need not mean a bonus must be paid, but the decision must be considered carefully to avoid a successful challenge.

It is more important than ever to ensure that bonus terms are well drafted and employers should take care to ensure that any bonus wording strikes the right balance between giving them the flexibility they require, and providing an appropriate incentive or reward to the employee.

Bob Cordran, partner, Thomas Eggar

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