In recent months the issue of non-payment of employee bonuses has come to the attention of the courts and the forefront of the media. Financial institutions in particular have come under scrutiny as some have sought to withhold bonuses promised to employees, presumably in response to increasing financial pressure and media scrutiny. But employers have the ability to withhold bonus payments from employees - so how discretionary is a discretionary bonus?

The ability of a company to withhold payment of bonuses will depend on whether the employee has a contractual right to receive the bonus.  If so, the employee may be able to enforce payment by claiming breach of contract if it is withheld.

In an attempt to avoid creating a contractual obligation, companies commonly provide in their contracts of employment that the payment of bonuses is at the employer's discretion and/or subject  to performance based criteria or other conditions being met.  However, the Courts and Employment Tribunals are showing an increasing willingness to find that bonus schemes which are expressed to be discretionary do in fact create a contractual obligationon the employer to pay bonuses.

The mere fact that bonus payments are said to be "discretionary" in an employee's contract is not necessarily determinative of the issue.  In determining the nature of a bonus labelled as being "discretionary", the Employment Tribunals have been directed to consider all of the relevant circumstances, including whether it has been the company's practice to make bonus payments to its employees over a number of years.  If the company has done so, the Employment Tribunal may decide that the employer's discretion to pay a bonus can in fact can be construed as having contractual content.

Tribunals are also directed to consider the nature and extent of an employer's so-called "discretion".  Does the employer have discretion as to whether to make payment at all, or is the discretion related only to the performance threshold or percentage of salary which will be paid? 

Even in the event that payment of bonuses is deemed to be at the employer's discretion, there is an element of restriction in that the employer is obliged not to exercise their discretion capriciously or in bad faith.

If an employee is deemed to be contractually entitled to receive a bonus then failure to make payment in full could lead to a breach of contract claim in the Employment Tribunal or High Court.

Claims can, however, be avoided if an employee's consent to receiving a lesser value of bonus or a deferred bonus, can be obtained.  In the current economic climate, obtaining employee consent in this way may be more likely than it sounds as employees may accept that a deferred/amended bonus would be better than nothing at all.

For employers faced with decisions relating to whether or not to make bonus payments, the message must therefore be to exercise caution and to be aware of limitations to so called "discretion".  Failure to do so, could lead to employers counting the cost in the Employment Tribunal or High Court.

Polly Rodway
Reynolds Porter Chamberlain LLP