A matter of choice

Many employers pay bonuses to their employees on top of their ordinary salary. The basis on which these are paid varies. Some are clearly contractual and the employer has no choice but to make the payments. However, it is common for employers to set up bonus schemes that give them the discretion to choose whether to pay a bonus at all or how much to pay. This sounds simple, but the position is often a lot more complicated in practice. Increasingly, the courts have found that bonus schemes described as discretionary in fact give the employee a contractual right to a bonus. It is still possible to design a bonus scheme that is discretionary, with the employer having no obligation to award any bonus or even to implement a scheme. If all documentation is drafted accurately and the bonus scheme is implemented in a way that is consistent with the documentation, a disappointed employee will not be able claim a right to the bonus. However, merely labelling a bonus scheme as discretionary does not guarantee non-contractual status. The employee may argue that they have an implied contractual right to it by reason of custom and practice, if bonuses have been paid on a regular basis. In addition, case law distinguishes between cases where the right to pay a bonus is entirely at the discretion of the employer, or where there is an express entitlement to some bonus, with only the amount being within the employer's discretion. In the latter, the courts have held that discretion should not be exercised capriciously or in bad faith, for example by paying a nil bonus. In most discretionary schemes, the employer sets out the criteria against which discretion will be exercised. For example, an employer might say that the payment of a bonus is linked to performance or particular measures of performance. If an employer is unable to demonstrate that they exercised their discretion fairly against these criteria, the courts could find that the employee was entitled to a larger bonus than they received. The employment appeal tribunal (EAT) has recently considered an interesting case on bonuses. Mr Small and other warehousemen were employed by Boots in two warehouses near Nottingham. The claimants employed in one warehouse transferred under the old TUPE Regulations to Unipart in August 2003. Those employed in the other warehouse transferred in April 2004. In April 2007, the warehouse undertakings were transferred back to Boots under the new TUPE Regulations. Therefore, Unipart (and then Boots) inherited the employees on their existing terms and conditions. Before the transfers of the warehouse operations from Boots to Unipart, the claimants had received performance-related bonuses. However, while employed by Unipart, they received no bonuses for 2005, 2006 and 2007. By contrast, the warehousemen who continued to be employed by Boots during that period continued to receive bonuses. The bonus scheme was referred to in several documents, including the particulars of employment for 1994 which stated, 'after a qualifying period of service, there are additional discretionary benefits, such as bonuses... However, they are not intended to be contractual.' The 1998 staff handbook stated that it formed part of the employee's contract, yet the introduction appeared to distinguish between contractual (section 4) and non-contractual (section 3) parts of the handbook. Bonus arrangements appeared in section 3: they were described in general terms and it said they were discretionary. Small and several other warehousemen brought claims before an employment tribunal for unlawful deductions from wages. They claimed they had a contractual right to receive bonuses in 2005-2007 and that this right had transferred to their new employers. The employment tribunal did not agree. It held that the claimants did not have a contractual entitlement to the bonuses during their employment with Boots, on transfer to Unipart, or on re-engagement by Boots because much of the relevant documentation prior to the transfers was 'couched in the language of discretion rather than obligation'. The claimants appealed.