A question that often arises is whether an employer has to pay a bonus when an employee resigns or is dismissed.
If a bonus entitlement is contractual, it has to be paid. There’s no option. If the employer doesn't pay, the employee can bring a claim for breach of contract and the employer may have to pay the value of the bonus.
Sometimes a bonus is described as contractual in the employment contract. More often, employment contracts say that any bonus is discretionary.
A genuinely discretionary bonus is one over which a company has some form of discretion over whether it's going to be paid or how much is going to be paid. The company is still at choice as to what those factors will be. A company could retain discretion over whether a bonus is payable at all. It may be a decision that it's made year on year based on the profits of a company, and if they don't meet a particular level, then a bonus won't be paid at all.
Alternatively, it can retain its discretion as to how much is going to be paid or the parameters that are going to be used to calculate the payment. And sometimes a company will retain discretion over whether a bonus is payable, how much is payable and on what basis.
Many businesses feel it's important to reassess how bonuses will be calculated year on year in order to ensure that bonuses are incentivising the right group within the business and depending on what the current business needs dictate. The discretion could also attach to the timing or frequency of the payments, or whether any other conditions, such as minimum retention periods or claw back could be attached to it.
Remember that just because a bonus is described as discretionary it doesn't mean that it will be. A bonus entitlement may have developed contractual force because of past payments and/or the payment of bonuses to others. When considering this question factors such as past payment of bonuses and any formulae that have been applied to calculate the amount come into play. If this gives a pattern of bonus paying which is sufficiently certain, then it may give rise to a contractual right.
If a company has the invariable practice of making bonus payments over many years, irrespective of whether KPIs are met, a court may well find that there is no discretion and the right to a bonus is contractual.
Even if a bonus is genuinely discretionary because the conditions for contractual entitlement have not been met, the employer may not always be able to withhold payment. There are limitations placed on the exercise of the employer's discretion with regard to a bonus.
The duties of an employer can be summarised as follows.
- The duty to exercise their discretion honestly and in good faith.
- The duty not to exercise discretion in an arbitrary, capricious or irrational way.
- The duty not to breach the implied term of trust and confidence that exists in employment contracts.
Whether the employer has breached any of these duties is fact dependent. But if a breach can be established, then the employer could be liable to make the payment of the full bonus to the employee, as well as covering their legal costs.
If you’re an employer with HR queries and problems, get in touch!
Although every effort has been made to ensure the accuracy of the information contained in this blog, nothing herein should be construed as giving advice and no responsibility will be taken for inaccuracies or errors.
Copyright © 2023 all rights reserved. You may copy or distribute this blog as long as this copyright notice and full information about contacting the author are attached. The author is Kate Russell of Russell HR Consulting Ltd.
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