Discretionary Bonus Schemes: How much discretion?

Bonus & Wages & Money

Does an employer have ‘complete’ discretion? 

Many employers will have a bonus scheme which is stipulated to be solely at the discretion of the employer. The reason for this is that it enables flexibility for the employer and does not, normally, create a binding obligation upon them to pay the bonus.

In the recent case, Patural v DG Services, the issue of discretionary bonus schemes was revisited.

The Law

Employment contracts include legally binding obligations between employer and employee. In return for providing services to their employer an employee will receive a number of benefits, including pay. Clauses within an employment contract are binding on each party in the same way as any other contract.

Subject to employment laws which override contractual agreements, employers and employees are free to agree the terms of the contract between them.

Employers will often include a clause in the employment contract which gives them discretion about the payment of and calculation of bonus payments and other benefits such as share options.

As long as an employer exercises their discretion, honestly, in good faith and in a way that is not arbitrary, capricious or irrational the courts and tribunals will not interfere with what is agreed.

The Facts

In this case Mr Patural was employed as a derivatives trader with DG Services, and in his employment contract it stated that he would be entitled to a discretionary bonus. Mr Patural’s contract and DG Services staff handbook described various factors which would be used to determine the payment and amount of Mr Patural’s bonus. One of the terms of Mr Patural’s contract stated that his bonus would be considered in a manner broadly consistent with his peers.

In the years 2008 and 2009 Mr Patural received a bonus amounting to 1% of profits he had generated in those years. This reportedly amounted to 1.2 million Euros.

Mr Patural received information that two of his colleagues had actually received bonuses of 8% and 11%.

Unhappy with his bonus Mr Patural made a claim in the High Court for breach of contract on the basis that they had breached an express term of his contract to treat him in a manner broadly consistent with his peers; that they had not acted in good faith; and that they had breached the implied term of trust and confidence.

 The Decision

The Court decided that Mr Patural’s claims had no real prospect of succeeding and they were not permitted to continue.

The Court referred to the fact that the clause itself in Mr Patural’s contract and the staff handbook made it clear that there was no contractual entitlement to a bonus and it was at the employer’s discretion. There was a difference between Mr Patural’s contract and his two colleagues referred to as they had bonus clauses in their contracts which guaranteed them a bonus based on a specific formula.

There was nothing in the wording of the contract or handbook which set an expectation of a minimum bonus award and that there had been no breach of the implied duty of the employer.

Points to note

In this case the two colleagues whom Mr Patural relied upon to compare to had different contract terms about bonus payments. The employer was also able to provide evidence that they had used various factors in deciding individual discretionary bonuses. Including the overall performance of the bank, the division and unit. They also took into account Mr Patural’s performance, financial and non-financial and the overall requirements of the employer to retain employees of certain skills levels and experience.

Clearly the employer had sound reasons for reaching the decisions that they did and were able to evidence these. The outcome may have been different if they had not.

It is therefore important, even with discretionary bonus schemes, to ensure that you behave fairly and reasonably in how you reach the conclusion whether to pay a bonus and how much.

What action do you need to take?

  1. If you have a bonus scheme in place which is discretionary ensure that you act fairly and consistently in reaching a decision about the bonus.
  2. If you want to introduce a bonus scheme or some form of performance related pay ensure that you seek advice about the terms used to convey such schemes to employees.

Case Name

Patural v DG Services (UK) Limited – High Court

You may also want to read another previous article on this point here


 

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The information contained in this blog post is provided for guidance and is a snapshot of the law at the time it is written. It is provided for your information only and should not be used as a substitute for obtaining legal advice that it specific to your particular circumstances.

The guidance should not be relied upon in any decision making process. It is strongly recommended that you seek advice before taking action.

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