Bonus Payments

Bonus payments are a bit like company cars, everything is okay until you don’t get the car you want or the bonus payment you believe you are due. Then it seems like World War Three has broken out. So what governs bonus payments? Well, the starting point is the employee’s contract of employment. What does it actually say about a bonus? In one case, a discretionary bonus was payable “dependent on individual performance” so the employee’s own performance was the only thing that the employer could consider in deciding how much to pay. If the contract contains no terms about how a bonus payment will be calculated, then it has been decided that the “implied duty of trust and confidence”, which is part of everybody’s contract of employment, means that the employer cannot act “arbitrarily, capriciously or inequitably in matters of pay. Employers are also required to tell an employee the reasons behind a decision to pay or withhold a bonus.

However, sometimes employees have unrealistic expectations. Let me give you an example to consider.

A man works in the City for a prestigious organisation. In 2003, he agrees with his employer that he can take a year’s sabbatical (a whole year off – lucky man!) to begin in April. In a letter recording what had been agreed, it said that the employee continued to be eligible to be considered for a disecretionary bonus for the year ending December 2003.

In December 2003, the employee was awarded no bonus. A year later he complained. Subsequently he resigned and claimed amongst other things, damages for non-payment of bonus. The question was, was the employer’s decision to award him a nil bonus irrational and perverse?

The employer’s position was that the main factors in determining whether to pay a bonus were:

1. The income generated by the individual. Before going on sabbatical, he had incurred losses for his employer of 2.3 million dollars.

2. Had he made any other significant contribution to the company? The answer was, no.

So was it unreasonable not to give him a bonus? No.

The lesson for employees. Just because you would like a bonus does not mean you deserve one.

The lesson for employers. Just because you call a bonus ‘discretionary’ or ‘non-contractual’ it does not mean that you can do exactly what you like. The courts may interfere if you seek to punish an employee by not paying a bonus that they have really earned.

Published 20/06/2007.