In these tough economic times, it is becoming increasingly difficult for employers to continue to pay bonuses. However, care should be taken if, as an employer, you do not pay a bonus to an employee.
The first hurdle to overcome is to ascertain if bonuses are contractual or discretionary. A bonus will be contractual if it is stated in the contract of employment that this is the case. Failure to pay a contractual bonus will be a breach of the contract of employment. If there is no provision in the contract of employment as to whether bonuses are contractual or discretionary, specific legal advice should be sought as failure to pay a bonus may be a breach of contract or constitute unlawful deduction of an employee's wages. Where a contract is silent on the bonus point, an employer's custom and practice will be evidence of what type of bonus it actually is.
Most bonuses are described in a contract of employment as “discretionary”. However, this terminology does not give employers the right to act perversely or irrationally in relation to exercising their discretion whether to pay the bonus. If a case goes to an Industrial Tribunal, County Court or High Court, case law suggests that it is for the employee to prove that the employer's decision not to pay a bonus is irrational or perverse.
The wording of the relevant term of contract should be carefully examined before a decision is made on payment of bonuses. Is the discretionary bonus based on profitability, sales, or other factors? These are the terms on which an employee's claim will stand or fall. A recent case has held that the decision not to award an employee his bonus because he had tendered his notice was unfair as it was not within the terms of the discretion. The discretionary bonus in this case was based on profit, performance and length of service.
So as an employer, what method of informing employees whether a bonus is to be paid or not should be followed? In a 2006 case, the court stated that an employer's failure to explain a bonus decision could amount to a breach of the implied duty of trust and confidence between the employer and the employee. The court stated, obiter, that the employer should do the following:
- - Explain it's bonus decision to the employee;
- - Disclose the factors which influence the decision;
- - Disclose who the decision-maker is.
If you have any further queries in relation to discretionary bonuses, please contact our Seamus McGranaghan, John Finnegan or Shauna McAleese for further information.