How discretionary is a discretionary bonus?
SOURCE: INSIDER, JULY / AUGUST 2008
The credit crunch continues to affect the financial markets and many employers are deciding not to pay bonuses at the same level as in previous years, and frequently not at all. But just how discretionary is a discretionary bonus?
The precise wording of a bonus scheme will be crucial. Care must be taken to distinguish between a bonus scheme which confers an entitlement to a bonus but leaves the amount at the employer's discretion (i.e. a partial discretion) and a scheme under which the employer has absolute discretion as to whether a bonus is payable at all.
Where an employer has absolute discretion, the employee will have no entitlement to a bonus. However, where there is a partial discretion the courts have held that discretion:
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must not be exercised capriciously;
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must be exercised in a genuine and rational manner;
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must not be exercised in such a way as to destroy the relationship of mutual trust and confidence; and must not be exercised in such a way as no reasonable employer would.
In some cases an employer's discretion may also be fettered by custom and practice, as in one case where a discretionary bonus scheme had operated for several years and the employer was prevented from withdrawing the bonus scheme once the bonus year had started. Inconsistent exercise of discretion should also be avoided to prevent discrimination claims.
The cull in bonuses will mean a very significant drop in income for many people, particularly those employed in the financial sector where bonuses have frequently far exceeded basic salaries. There have been numerous reports of novel attempts to challenge the established rules and we can expect further test cases in the coming months.
AUTHOR: ALISON GOW
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