Discretionary bonuses

The issue of entitlements to bonuses is always an interesting area in employment law. As with many employment law related matters, what a contract says is not necessarily definitive and extraneous facts and past practice are often important considerations, but this does not negate from the fact that it is vital, from an employer’s perspective, to have a well and carefully  worded clause in the contract of employment.

In addition, employers need to be wary of non-contractual related claims when it comes to bonuses, such as the potential for discrimination claims, so decisions and the underlying rationale for decisions should be carefully thought out and fully documented when deciding on discretionary employee rewards, just as in many other employment related decisions.

The bonus issue is particularly relevant this year as it appears that banks, under unprecedented pressure due to the general public anger at the so-called fat cat culture, are apparently likely to award a far higher number of “zero bonuses” in 2011. Senior banking employees often expect to receive what amounts to the majority of their pay each year at bonus time, so this is  a big issue and a political one, with the argument being that banks have caused a lot of the economic problems affecting the general population so should share in the necessary austerity. This approach creates legal risks that such decisions will be challenged by employees, notwithstanding that many may have clauses in their contracts providing that any bonus is discretionary.

Senior employees in banks are likely to argue that even though such clauses favour the employer, custom and practice and in all likelihood a previous established history in the employment relationship is that a bonus is an important, expected and paid part of their remuneration each year and as such, whilst there may be an element of discretion, this should not mean, in reality, an entitlement of the employer bank to pay nothing as bonus.

One option for employers is to pay a very modest bonus rather than nothing, as this makes it harder for an employee to challenge.