Can a discretionary bonus be paid after a worker ceases employment?

Can a discretionary bonus be paid after a worker ceases employment?

Many professionals have a base salary upon which they can build through a bonus structure or scheme of some sort. Bonuses are intended to boost, enhance and reward motivation, performance and loyalty.

We are frequently told that employees are aggrieved when their employers refuse to pay a bonus which they would have received if they had not resigned or had continued in employment. We are then asked whether payment can be enforced legally.

The law in the area can be grey, and the application of the law can also be difficult, especially when such bonuses are expressed to be discretionary.

English law

The law in England is that where an employment contract provides for payment of a bonus, but payment is discretionary; there is an implied term that the discretion will not be exercised “capriciously, arbitrarily, irrationally or perversely”. The employer’s discretion, therefore, is not absolute.

Australian law

The law is less developed in Australia but decisions in some jurisdictions have adopted the English approach.

For example, the Victorian Supreme Court considered the exercise of an employer’s discretion with regard to bonus payments in Eshuys v St Barbara Ltd . In this case, the plaintiff was the company’s Managing Director. His contract included a final performance payment up to $1,000,000 to be decided by the board in its discretion, based on the “extent of compliance” with the stated performance criteria.

The parties to the case agreed that the English principles applied; that is, an employer is not to act “capriciously, arbitrarily, irrationally or perversely”, or, not to reach a decision which “no reasonable board” could make. The Court added that these principles should be applied with an understanding of the particular commercial context in which the contract was entered into and the decision was made.

The plaintiff failed to show the board acted irrationally or perversely in exercising the discretion and the plaintiff failed. The lesson here is that the payment of a bonus is dependent both on the precise nature of the contract and the commercial context facing the employer.

Often the purpose or intent of a bonus clause in a contract is that it is to be both an incentive for high performance and a reward for loyalty. It will therefore often be legitimate for an employer to refuse to pay a bonus because the employee has resigned from the employment even if the employee would otherwise qualify.

There are, however, instances in which a bonus may be paid after cessation of work. If a bonus is based on the meeting of clear, set targets which measure individual performance, for example, an employer cannot choose unreasonably or indiscriminately not to pay the bonus if the targets are satisfied.

The possibility of a bonus being paid after cessation of employment depends largely on the contractual wording of the bonus and the commerciality of the payment.

Rulings in favour of both employer and employee are possible.