How Discretionary is a Discretionary Bonus?

Concerns over banker’s bonuses and the “bonus culture” have, given the current economic climate, received much recent media attention, there has been, for example, a suggestion that much of Sir Fred Goodwin’s RBS early-retirement pension arrangement was “discretionary”.

Employers may wrongly assume that, by calling a bonus “discretionary”, it is safe for it to be reduced or not paid at all. A recent Employment Appeal Tribunal case shows that making such an assumption may be dangerous.

The case concerned involved Boots the Chemist, where the aggrieved employees (who were warehousemen) were seeking to sue the company for non-payment of bonuses. The EAT backed the employees’ claims, pointing out that “discretionary”, in the context of a “discretionary bonus”, may have various applications, for instance:
• the provision of an over-arching bonus scheme
• a decision to pay, or not to pay, a bonus in a particular year
• the method of calculating a bonus
• threshold or performance targets which trigger a bonus.

As use of the word “discretionary” is not in itself sufficient to determine whether there is legal entitlement to a bonus, an important starting point is to look carefully at the terms of the relevant employment contract.

It is, therefore, imperative that employment contracts are meticulously drafted because, if the terms of a bonus scheme are ambiguously worded, an employer may later encounter contractual difficulties.

The recent EAT ruling demonstrates that attempts, amid the current economic gloom, to freeze or scrap bonus payments may successfully be challenged in court - even schemes that are apparently discretionary may be held to be contractually enforceable.

This article was written by Lara Murray, a Solicitor in our Employment department.