An absolute right?
Ian Machray explores whether employers can exercise absolute discretion regarding bonus payments.
Employers tend to reserve maximum discretion regarding eligibility and amounts when offering a bonus to employees. Employers will often make clear in the employment contract that any bonus award is discretionary. However, case law suggests that in some situations a discretionary bonus may become contractual and binding through custom and practice or by some subsequent promise not contained in the original contract. To become a custom and practice, the bonus must be an expected, long-standing, well-established, regular and well-known practice.
In addition, whilst the contract of employment may state that the bonus is discretionary, a contrary promise may fetter this discretion. The promise does not need to be formal or written in order to be binding. However, it must be clear, certain and could reasonably be relied upon by the employee. Once such a promise is declared it would form part of the contract.
Bonuses which become contractual cannot be withdrawn or amended without consent by employees and a failure to award a “discretionary” bonus could be deemed a breach of contract. Due to the employers’ position of power, they also owe certain obligations to their employees in exercising their discretion.
In addition, when exercising discretion employers must comply with implied duties of trust and confidence, honesty and good faith and not act arbitrarily or irrationally. Therefore, employers who exercise absolute discretion with complete disregard to these implied duties and without reasonable justification, risk the decision being challenged.
Employers must be aware of the risks of unintentionally creating a binding obligation to award ‘discretionary’ bonuses. To minimise this risk, employers must have clear processes in place when offering and awarding bonuses, refrain from discussing bonuses on an informal basis, clearly document and justify any decisions and be careful when regularly awarding a bonus which may be perceived as custom or practice (if this is not their intention). Above all employers must act reasonably and in good faith.