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Bonus schemes: are they really discretionary?

Bonus payments tend to form a significant part of an employee’s remuneration package; and therefore, it is important to ensure that any bonus schemes are considered carefully. In most cases, bonus schemes are stated to be discretionary; however, are they really?

Here, we explain the most common types of bonuses:

  1. Contractual
  2. Discretionary

Contractual bonus schemes

If an employee’s remuneration package includes participation in a contractual bonus scheme, and the employer fails to pay the bonus, then an employee will potentially have a claim for breach of contract and seek damages against the employer.

Discretionary bonus

There are two elements to a discretionary bonus. Firstly, whether to award a bonus, that could be either contractual or discretionary, and secondly, how much. In a discretionary scheme, the employer could potentially argue that it was a discretionary scheme if it wanted to avoid paying it.

If, however, an employer decides for whatever reason not to pay a bonus where the scheme is discretionary, the employee should note that there are limits on an employer’s discretion.

These limits are:

  • the employer has a duty to exercise discretion honestly and in good faith
  • the employer has a duty not to exercise discretion in an arbitrary, capricious and irrational way
  • the employer has a duty not to breach the implied term of trust and confidence when exercising it’s discretion.

If an employee meets the bonus criteria, an employer must have reasonable grounds for not paying that bonus if it is defending a claim that it has exercised its discretion in good faith. Furthermore, if the reason for not making a bonus payment is because of a protected characteristic, for example on the grounds of sex, race, or disability, then the employee may have a claim for discrimination.

The fact that bonus payments are stated to be discretionary in an employment contract is not necessarily determinative of the issue. Therefore, if you have an issue with your employer in relation to the payment of a bonus, consider reviewing the contract of employment carefully and the rationale provided by your employer for not paying the bonus.

If you would like any further information or guidance, please contact:

Sejal Raja
Partner and Head of Employment

T. 020 7227 7410

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