Discretionary Bonuses: Are you legally entitled to a bonus?
The mere fact that an employer specifically describes a bonus scheme as “discretionary”, or states that an employee’s participation and eligibility under a bonus scheme is at the employer’s discretion will not necessarily entitle an employer to decline to award an employee a bonus.
The Court’s interpretation will depend on the wording of the employment contract. The position in Australia is that employers cannot capriciously, arbitrarily, irrationally or perversely decline to award bonuses, unless the employment contract makes it clear that the employer can do so.
The NSW case of Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 looked at this issue.
Lindley commenced employment with Silverbrook Research Pty Ltd (“Silverbrook”) in 2003. The employment agreement stated that Lindley was eligible to receive an “Annual Performance Bonus” subject to two other clauses. One of those clauses provided that Silverbrook would assess Lindley’s performance against set objectives at the end of each quarter, and provided Lindley’s performance satisfied the set objectives, and subject to the remaining clause, one quarter of the Bonus would be paid to Lindley within 21 days of the end of each quarter. The remaining clause provided that the decision as to whether Lindley should receive the Bonus was entirely within the discretion of Silverbrook.
Silverbrook did not create set objectives against which Lindley’s performance could be evaluated. Accordingly, there was never any assessment of Lindley’s performance, and never any payment of a bonus.
Lindley terminated the employment agreement in 2008 and commenced legal proceedings for damages against Silverbrook for a number of breaches of the employment agreement, including failure to set objectives, and failure to review performance against those objectives to determine entitlement to the bonus.
Upon termination, Silverbrook made an ex-gratia payment of $48,165.13 to Lindley.
In the initial District Court proceedings, it was held that Silverbrook had breached the employment agreement as alleged. This decision was appealed to the NSW Court of Appeal
On appeal, his Honour Justice Allsop indicated:
- The fact that Silverbrook retained the discretion to award a bonus should not be construed so as to permit Silverbrook to withhold the bonus “capriciously, or arbitrarily, or unreasonably”, or to allow Silverbrook a free choice as to whether or not to perform a contractual obligation;
- Silverbrook’s discretion to award a bonus needs to be considered within the context of the employment agreement;
- Silverbrook needed to exercise the discretion honestly within the purposes of the employment agreement;
- There may be circumstances, such as employee misbehaviour, or financial issues, in which it would be legitimate for a bonus to be denied, however it is impermissible for payment of a bonus to be denied in an unreasoned, arbitrary refusal to pay a bonus, regardless of the circumstances; and
- If Silverbrook wished to make payment of the bonus entirely voluntary so that payment could be withheld capriciously, notwithstanding compliance with objectives as specified, this would be legitimate provided this was clearly indicated within the employment agreement.
The Court held that Lindley was likely to have been awarded bonus payments during her time working for Silverbrook, and thus Lindley was entitled to damages for Silverbrook’s failure to set objectives and evaluate Lindley’s performance in accordance with the employment agreement.
The Court awarded Lindley damages in the sum of $80,000.00. The Court ordered that the ex-gratia payment made to Lindley be considered to be part of these damages, and deducted the damages subsequently owed by Silverbrook accordingly.
The Silverbrook case was more recently relied upon in a Victorian Supreme Court case, Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163.
Loone was employed by Crowe Horwath (Aust) Pty Ltd (“CHA”), an accounting firm, from late 2000 to mid-2016. Loone’s employment agreement provided that Loone may be eligible for a yearly discretionary bonus payment, the amount of which would be determined by consideration of various parameters, including “personal performance, the performance of the Group, and the broader economic conditions.”
From 2014 to 2015, Loone spent in excess of 600 hours negotiating the acquisition of another accounting firm by CHA. This acquisition made CHA a significant profit, and was expected to lead to a marked increase in the bonus pool available for distribution to eligible CHA employees, including Loone.
In June 2016, Loone was advised by CHA executives that the system for bonus payments was to be altered, and as such employees would be receiving 80% of their bonus payment in the relevant bonus year, and the remaining 20% of their payment would be deferred for a period of three years (“the deferral bonus decision”).
In July 2016, Loone was advised that the profits related to the acquisition would be excluded from the calculation of the bonus pool from which Loone was eligible to receive a payment (“the exclusion bonus decision”).
Loone subsequently left CHA, and CHA commenced legal proceedings to enforce post-employment restraints. Loone counter-claimed that CHA had breached the employment agreement, in part due to the deferral and exclusion bonus decisions.
In relation to the deferral bonus decision, the Court stated:
- With reference to Silverbrook, where an employment agreement contains a discretionary bonus, the discretion conferred upon the employer must be understood against the proper scope and content of the agreement;
- Despite the bonus payment being discretionary, the employer cannot arbitrarily choose it need not pay a bonus in circumstances where set objectives have been satisfied;
- It is plain from the employment agreement that both the discretionary and non-discretionary components of Loone’s remuneration were payable within a 12 month period; and
- CHA’s proposal to defer payment of a portion of the bonus was a breach of the employment agreement.
In relation to the exclusion bonus decision, the Court indicated:
- The employment agreement confers an absolute discretion upon CHA as to the quantum of any bonus paid to Loone;
- The exercise of that discretion is subject to a mandatory contractual obligation to consider the prescribed criteria;
- The fact that the employment agreement confers an absolute discretion upon CHA does not preclude a finding that a failure by CHA to have regard to the prescribed criteria in determining the quantum of any bonus constitutes a breach of the employment agreement; and
- CHA’s proposal to exclude the profits from the acquisition from the bonus pool from which Loone was eligible to receive a payment was a breach of the employment agreement.
The Court, in subsequent further proceedings related specifically to the assessment of damages owed to Loone (Crowe Horwath (Aust) Pty Ltd v Loone (No 3) [2017] VSC 548), awarded Loone the sum of $142,778 in damages, in respect of his bonus entitlement for the year 2015/2016.
Conclusion
If an employer creates an agreement with an employee wherein the employee is eligible for a bonus provided particular performance criteria are met, and the employer states that payment of a bonus will be at their discretion, the employer must set clear performance criteria, and honestly evaluate the employee’s performance against those criteria, and cannot in exercising a discretion act capriciously.
However, if an employer creates an agreement with an employee wherein the employee is eligible for a bonus provided particular performance criteria are met, but the employer states that the decision to award a bonus will be at their discretion regardless of whether those criteria are met, the employer may to decline to award a bonus arbitrarily. The extent of the employer’s discretion must be understood against the scope and content of the employment contract.
Discretionary bonuses are an area of the law that is by no means straightforward, and can be difficult to navigate unassisted.
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