Weekly dilemma: Paying bonuses to former employees

Q Our employees are remunerated on a salary and bonus structure based on performance throughout the calendar year. All the contract states is that bonus is discretionary up to a maximum of 50% of salary. For many years we have operated on the basis that individuals receive a bonus according to personal and company performance, and it is paid in March after the calendar year in question. One of our employees who had a successful 2005 has recently been dismissed for gross misconduct prior to payment of the bonus, and is going to a competitor. He claims he is entitled to the full performance bonus for 2005, but we don’t want to pay. Is he correct?

A The law of contract, developed by the courts in relation to the exercise of discretion in the award of bonuses, has developed rapidly in recent years, yet the drafting in many employment contracts, such as yours, has not kept up. This is partly why you find yourself in this difficult scenario.

The answer to the question lies in the contract but the written contract does not give the full picture.

The written contract should always be the first port of call. In your case, the written contract states that a bonus is discretionary. On the face of it, this discretion appears absolute, but in recent years the courts have limited that discretion in relation to deciding a bonus, including an implied term that discretion will be exercised ‘rationally and in good faith’.

Given that bonuses have always been paid to employees for good performance in a particular calendar year, there seems little doubt that your employee is entitled to a substantial bonus, perhaps the full 50%.

Going forward, you should consider amending your contract to expand the criteria on which you provide bonuses. To encourage retention, you could consider including a clause which states that bonus payments will not be paid to employees who leave the company.

Daniel Naftalin, partner, employment group, Mishcon de Reya

Each week we ask the experts to answer your legal dilemmas. If you have a legal question or dilemma, e-mail dawn.spalding@rbi.co.uk

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