A question of discretion

We operate a discretionary bonus scheme for employees.  Given current pressures on the business, we were not going to award any bonuses this year, though we always have in the past.  Do we face any problems?

If a bonus is expressed to be payable at the absolute discretion of the employer then, in principle, employees might struggle to claim that they are entitled to receive a bonus. However, over the years, there have been many challenges to 'discretionary' bonus schemes.  In some circumstances, bonuses are perhaps subject only to a partial discretion, or there may be a contractual right to the bonus through custom and practice: for example, if you have always automatically awarded a bonus in the past with no real discretion being applied.

Case law suggests that the scope of the employer's discretion in relation to a bonus might differ from scheme to scheme.  For example, it might, at its widest, mean exercising discretion as to whether to pay the bonus at all, or only how to calculate it, or the amount of the bonus.  Accordingly, each scheme must be carefully considered to asses where and how the discretionary element applies.

An employer does not have to exercise its discretion 'reasonably' but must not act so as to destroy or damage the implied term of trust and confidence, which could lead to claims of constructive dismissal. 

For advice or more information please contact Kerrie Hunt.

Originally published in South West Business, 1 August 2011.

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