Often, there is uncertainty
about whether a bonus which is expressed to be "discretionary"
in an employee's contract truly gives the employer an unfettered
discretion, or whether that discretion must be qualified.
This is particularly relevant where an employee is under notice
or has just left employment. The employee may have already
performed well for the bonus year, but has no future with
that employer. Can the employer then exercise its discretion
to avoid payment of bonuses for past performance?
Although the terms of a bonus will usually have been discussed
in detail with the employee (and may even have been built
in to an offer letter), when disagreements over bonus payments
arise contractual documentation is often sadly lacking. The
clearest position for all parties is where the bonus is expressed
to be "contractual" and based on a specific formula.
For example, it may be linked to individual performances and
targets achieved, or the employer's performance as a whole.
There is little room for manoeuvre by an employer in these
circumstances, even if the employee is under notice, but has
worked the full year.
Most schemes however, are expressed to be discretionary.
Such schemes usually still include some kind of bonus criteria
(such as the achievement of individual or departmental targets)
for determining the amount of the bonus, but will always reserve
to the employer the right to decide whether those payments
are actually made.
It is now accepted that there is no such thing as an unfettered
discretion. Various decisions by the courts in recent years
have determined that an employer must exercise its discretion
in good faith and on reasonable grounds. It follows therefore
that if an employee meets his bonus criteria an employer must
have reasonable grounds for not paying the bonus if it is
to show that it has exercised its discretion in good faith.
An employer may find it difficult to establish such a reason
if it is not specified in the bonus arrangements.
An employer may similarly find it difficult if it has by
custom and practice paid bonuses to other employees who have
similarly performed over the year, but has decided to use
the non-payment of a bonus as a tool to "freeze-out"
a certain employee. What better way of signalling to the employee
that he is no longer welcome by paying him far less bonus
than his colleagues received? As it happens, an effected employee
would potentially have the right to claim constructive
dismissal in these circumstances, and such claim would
include non-payment of the bonus.
Often, the question arises whether payment of a discretionary
bonus should still be made on termination of employment -
whether the employee has resigned, or has been dismissed.
If the employee has been dismissed for gross misconduct, there
will almost certainly be no requirement to pay outstanding
bonuses. In cases of gross misconduct, the employee will be
in breach and will be dismissed summarily. Accordingly, any
bonuses, which have been earned, but not paid, will be forfeited.
It is worth noting, however, that if the dismissal is unfair
(on procedural grounds) the employee could potentially claim
his loss of earnings arising from the unfair
dismissal. This would include entitlements to bonus.
However, if the employee resigns with notice in accordance
with his contract of employment or he is made redundant, the
position will not be so clear. In such circumstances, the
employer will have three options: to allow the employee to
work his notice period; to place the employee on garden leave
or; to elect to pay the employee in lieu of his contractual
entitlement to notice (assuming this right is reserved in
the contract).
If the employer elects to pay the employee in lieu of notice,
the employee will not be employed at the bonus payment date
and will therefore not be entitled to receive a bonus. If
there is no contractual right to pay in lieu however, the
payment in lieu would amount to a breach of contract. In such
circumstances, the employee could issue proceedings and would
be entitled to recover the sums he would have been paid during
his notice period - including the bonus.
Where the employee is working his notice
or is on garden leave at the bonus payment date and the employer
has sought to withhold the bonus, recent case law has come
down on the side of the employee and the employer has been
compelled to honour the bonus payment.
There is little doubt that there is a change in culture of
how employers should now be considering the payment of discretionary
bonuses. Employers are no longer able to decide such matters
behind closed doors, without any rationale to the decision
being made or, perhaps worse, make their decision based on
a personal dislike of an employee. There should be transparency
in both entitlement and decision making.
Other aspects of
UK employment law for employees include:
Landau
Zeffertt Weir Solicitors