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All I Want For Christmas....(is a Bonus)
At this time of year, if you're an employee, chances are you're hoping that all your hard work over the last 12 months has paid off (literally) and at the top of your Christmas wish list is a Christmas bonus.
On the other hand, if you're an employer, you may be considering who deserves a yuletide reward and who may be contractually entitled to one.
Whilst bonus schemes are generally either contractual or non-contractual, in practice, the boundaries are less clear. Read on to obtain a better understanding of the law in this area.
Discretionary bonuses (Bah, Humbug!)
If an employer retains an "absolute discretion" to pay a bonus, an employee may struggle to claim one. In the leading case of Lavarack v Woods of Colchester Ltd [1966] EWCA Civ 4, an employee's fixed term contract provided for a bonus (if any) "as the directors shall from time to time determine". On a wrongful dismissal, the court held that the employee was not entitled to compensation for the loss of the chance to receive a bonus, despite his expectation of receiving it.
An employer may also retain a partial discretion. Where there is an entitlement to a bonus but the employer retains discretion as the amount, that discretion should not be exercised capriciously or in bad faith. Where an employer specifies conditions or criteria to be applied before the discretion is exercised (such as merit and personal or company performance), an employee may be able to argue that an exercise of discretion not in their favour was not exercised in good faith.
Discretionary or contractual? (Silent Night or Joy to the World)
Bonus schemes should be drafted carefully as an employee may later seek to rely on them in circumstances where an employer may want to avoid any such obligation. Use of the word "discretionary" will not guarantee that the scheme is, in fact, discretionary. All relevant circumstances, including any historical practice of making payments will be relevant when deciding whether the discretion in the documentation is to be interpreted as having contractual effect.
Even if a scheme is discretionary, an employee may be able to argue that they have an implied contractual right arising from custom and practice, if bonuses have been paid on a regular basis. For example, an employer may not be entitled to withdraw a discretionary scheme without giving notice. In Noble Enterprises v Lieberum, UKEAT 67/98, the employer had discretion whether to operate a scheme from year to year and had done so for five years. It did not inform the employee that it intended to discontinue the scheme before the bonus year began; therefore the employee had a reasonable expectation that he would receive a bonus.
Further, if an employer gives oral assurances that a bonus will be paid, subject to contract law principles (offer, acceptance, consideration and intention to create legal relations), a contractual obligation may arise.
On the flipside, an employee may believe he has a bonus entitlement when he does not. For example, in Midland Bank plc v McCann UKEAT/1041/97, the Employment Appeal Tribunal held that a pay scheme which provided that bonus awards would take account of performance but that payment of any bonus was wholly discretionary was indeed discretionary, even though its details were contained in a contractual handbook.
Contractual bonuses (Peace on Earth and Goodwill to all Men)
Where contractual, a scheme is usually straightforward and the document needs only to be interpreted, emphasising the need for careful drafting. For example, where a document guarantees that an annual bonus will be not less than the previous year's, the lack of a specific figure does not detract from the binding promise to pay a bonus.
Where a specific sum is guaranteed, an employee should ensure that the bonus payment is expressly included in any pay in lieu of notice clause in the contract else the employer could terminate the contract just before the bonus is due and avoid paying it (Locke v Candy and Candy Ltd [2010] EWCA Civ 1350).
A contractual scheme may contain discretionary terms, such as calculating the amount by reference to objective performance criteria (for the employee and/or the business). The greater the degree of subjectivity, the more room there will be for dispute: for example, if a bonus is based on sales targets, this will be easier to determine than if based on the employee's general performance. Any opinions must be formed reasonably and in good faith.
If performance conditions have been set and the employer has discretion as to whether they have been met, if they have indeed been met, there will be obligation to award the bonus. In McCarthy v McCarthy & Stone plc [2006] EWHC 1851 (Ch), the court held that once the performance conditions under a share option scheme had been satisfied, the employer had no discretion not to award the share options to the employee, despite his misconduct.
At Fortune Law, we can assist with a whole host of employment law issues including the drafting of bonus provisions and schemes, advising employees on the terms of their contract or scheme, particularly in light of a dismissal and dealing with share option schemes. Please get in touch with us at enquiries@fortunelaw.com or on 020 7440 2540.
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