“In the spring a young man’s fancy lightly turns to thoughts of love”[1].

This is also the time of year for thoughts of the annual bonus. So, what should you be thinking about before the bonus announcements are made?

The first thing to consider is the contractual status of the scheme and how far, if at all, you have discretion over the amounts payable. This will depend on what is actually documented and clear drafting is essential. Just because a bonus scheme has been labelled ‘discretionary’ in employment documentation does not mean that it does not have contractual status.

Even where the bonus scheme apparently allows broad discretion over whether, when and how much to pay, this is almost always limited. An employer is always under a duty to exercise its discretion in a way that is not ‘capricious, irrational or perverse’.

Recently, the courts have determined that employers are also under a duty to act reasonably[2], that is that they should always follow a fair process in making decisions and ensure that all relevant factors (and no irrelevant factors) are taken into account.

However good your documentation is, you should always watch what you say. It is often tempting for managers, in a spirit of ‘motivation’ to say ‘warm words’ about bonuses. This, however, can be dangerous as illustrated in a recent case.[3]

In this case, the employer had a very detailed sales commission scheme, which was set out in the employee’s, Mr Hills, contract of employment and in two further contractual documents. Mr Hills was involved in negotiating an important deal for Niksun and was told that he would be ‘looked after’ and would get the ‘lion’s share’ of any commission due. When the amount of commission he would be getting was actually announced, he didn’t feel at all ‘looked after’ and successfully brought a claim for breach of contract.

The Court of Appeal determined that the decision-maker should have had regard to the contractual documentation, the facts of how the deal was concluded and the assurances that had been given that Mr Hills would be ‘looked after’.

What does this mean in practice?

  • Take care when documenting the rules of the scheme. The courts will always look at what it actually says and, where there is any ambiguity, will decide in the employee’s favour.
  • Look at what has been awarded to other employees. Lack of consistency can leave you open to legal challenge, unless there are clear reasons for differences in treatment. Remember, employers with more than 250 employees will, from April 2018, have to report on the differences in bonuses awarded to men and women.
  • Be prepared to explain your decision and have solid and sensible reasons for why your decision is reasonable.
  • What do you do about employees on different types of leave – maternity, shared parental leave or indeed those on long-term absence? Or those whose disability might make them less likely to achieve bonus targets?
  • Take advice. Money may not buy you love, but it can buy you a well-documented and unambiguous bonus scheme. And that could save you money in the long run.

This post was edited by Helen Webster. For more information, email blogs@gateleyplc.com.

[1] ‘Locksley Hall’ by Alfred, Lord Tennyson, 1835

[2] Braganza v BP Shipping Ltd

[3] Hills v Niksun Inc

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.