Many employment contracts include terms relating to ‘discretionary’ bonuses and the employer in such cases may consider that there is an absolute right to pay such a bonus or not, at the whim of the employer. Seems reasonable, doesn’t it? Well, no!
There is a string of decided cases which state that even where the payment of such bonuses is within the absolute discretion to the employer, the discretion must be exercised reasonably.
In a recent Federal Court case Russo v Westpac Banking Corporation, Mr Russo, who had been made redundant by the bank and was not therefore employed by it on the usual bonus vesting date was successful in arguing that the bank had acted unreasonably in classifying his performance as ‘inadequate’. The court held that he was contractually entitled to a bonus equivalent to the payment to him in the previous year.
In this case, the bank had not followed its own internal policies in assessing Mr Russo’s performance. There had been no one-on-one performance meeting, and his performance was not properly measured against his set targets. From this it followed that because the assessment process was flawed, the Bank’s refusal to pay a bonus was unreasonable and in breach of the employment contract. Mr Russo was awarded his bonus plus his costs.
The take out for employers is: Remember your decision to pay or not pay a discretionary bonus is not an arbitrary one. You must act reasonably in the circumstances of each case.
If you wish to be free to withhold discretionary bonuses because of employee misconduct or your business is undergoing some financial pressures, then you must state that in the employment contract.