Companies which offer their staff bonus schemes face issues as to whether they are contractual or discretionary. Substituting part of a remuneration package with a bonus payment can be an invaluable HR tool for giving staff both an incentive and a greater feeling of fair reward for achievement.
But should the bonus payment be at the company’s discretion? A contractual bonus may act as a greater incentive because the employee can be sure he or she will definitely be rewarded under the scheme and by how much.
The parties’ negotiating positions can be decisive. The employee may be in a strong enough negotiating position to insist on a non-discretionary bonus arrangement. But a discretionary bonus scheme or a contractual scheme providing for a discretionary sum gives the employer welcome flexibility for unforeseen circumstances.
Or does it? Two recent cases show that even a discretionary bonus can, in practice, be contractual.
In Clark v Nomura International, Nomura decided not to make Clark any payment under its "discretionary bonus scheme" because he was working out his notice. Nomura, not unnaturally, thought that the payment of bonus to an employee who was leaving would be a waste of its money with no incentive factor. Clark sued the company for his bonus payment in the High Court.
The court found that, under the contract, payment of bonus was dependent upon individual performance and there was nothing about Clark’s performance to suggest he did not merit a bonus payment.
Therefore, the decision not to make him a bonus payment was perverse. The court calculated what it considered to be a reasonable bonus payment and awarded it to him.
It added that a decision to award a perversely low level of bonus to an employee in the hope that he or she would leave would amount to a fundamental breach of contract, which would justify a claim of constructive dismissal.
In Chequepoint (UK) v Radwan, the Court of Appeal considered a not uncommon bonus provision that such payments were at the discretion of the company and employees would be notified of the terms of the bonus scheme from time to time.
The company notified all staff of the bonus scheme payments for the subsequent four years. One of the employees, Radwan, was unfairly dismissed during the four-year period and claimed the payments he had been told he was in line to receive under the bonus scheme.
The court held that, although the bonus payment scheme was described as discretionary, once employees had been notified of what the bonus payment would be, their entitlement would become contractual. Radwan was therefore entitled to the bonus claimed.
Greater care in dealing with the bonus position could perhaps have helped both Nomura and Chequepoint. Nomura could have stated in the contract that no bonus would be payable once notice of termination had been given by either party. Chequepoint could have left the bonus provisions as entirely discretionary.
But Nomura may not have been able to attract quality staff if it deprived them of bonus payments for the notice period and Chequepoint would have lost a big incentive element in its bonus payments if it had not spelt out what they would be.
Ultimately, employers may have to accept that they risk having to pay out bonuses when they would ideally not wish to, in return for reaping the rewards of the bonus as an effective incentive.
Key points
- Discretionary bonuses cannot be withheld perversely.
- Once employers have notified employees of the bonus payable under a discretionary scheme, employees have a contractual entitlement to it.
- In practice, employers may have to sacrifice flexibility of bonus provision to increase its incentive value.
By Jill Kelly, a partner with Tunbridge Wells law firm Thomson Snell & Passmore
