Is a discretionary bonus truly discretionary?

If your bonus was not what you were expecting or you’ve found out that some of your colleagues received more than you did, is there anything you can do about it if the bonus scheme is discretionary?

Recent case law suggests that employees may be in a stronger legal position to challenge discretionary bonus awards.

Do employers have to give a bonus?

In almost every instance an award scheme is referred to as “discretionary” or there is reference in the award scheme to the amount of the bonus being “entirely discretionary”.  Employers like this label because it makes them feel safe in the belief that they will not be accountable for any awards withdrawal or its application. Recent case law however challenges this assumption because the Courts now appear more than willing to scrutinise and intervene in cases relating to discretionary benefits.

The Courts are prepared to give particular consideration to issues of “rationality”, “legitimate expectations” and “relevant considerations” when deciding the legal limits of an employer’s discretion and whether the employer has acted within those limits.

Many people have an employment package that is made up of a basic salary plus a bonus (in some cases often a substantial bonus). The bonus element is frequently linked to the employee having to meet certain performance criteria which are often not recorded or appear to be constantly moving.

What happens if an employer uses a discretionary bonus scheme perversely?

The basic principle is that an employer should not exercise its discretion perversely. To act perversely goes to the heart of the employment relationship, destroying the implied term of trust and confidence that should exist between an employer and employee, and gives rise to a constructive dismissal / breach of contract claim.

In order to show perversity, an employee must be able to establish that the award decision was irrational in some respect. If an employer is unable to present a credible explanation, this will support the contention that it has acted irrationally.

The Courts also seem, when looking at discretionary benefits (including bonuses), to be particularly interested in the concepts of:

• “legitimate expectation” – in Brogden v Investec [2014], the judge agreed with the employees who argued that they had a reasonable expectation that the “institutional market rate” would be used in the computation of their bonus; and
• “relevant consideration” –   the consideration of an irrelevant factor in determining a bonus award may be enough to challenge an employer’s decision in respect of an award of a bonus. An alert moment for all companies who lay down clear performance criteria or formulae! The Court will focus on these criteria and formulae and are unlikely to be interested in other factors taken into consideration when determining the amount of the bonus awarded. On the other hand, having no criteria at all exposes an employer to discrimination claims in the Employment Tribunal. It could be a no-win situation!

What does this really mean for those who participate in a discretionary bonus scheme?

1. There are a few more arguments open to individuals to challenge a bonus award which they feel is unfair or not reflective of their performance or their reasonable expectation.
2. Employers are naive if they believe that a Court will not interfere with its decision- making process because the employer has “discretionary power” in respect of the bonus award it gives.
3. The Courts are much more willing to scrutinise discretionary bonus decisions.
4. It may be easier to show that a bonus award is irrational if made on the basis of “this feels the right amount” or “she’s done a good job but is not great to work with…” or “he deserves more than him because he’s got good relationships with our clients…”
5. Bonus decision-makers who do not have a very clear, fair or consistently-applied process for determining bonus awards are likely to be easily unravelled under intensive cross-examination in front of a judge. This is likely to support an argument of irrationality.