Employee bonuses are an important part of an employee’s remuneration package so if they are withdrawn, it can amount to a fundamental breach of contract or be the basis of a claim for constructive unfair dismissal.

Bonuses are usually discretionary and based on profitability, turnover or the efforts of the individual employee. In recent years, courts have been more willing to find that bonus payments are legally enforceable, even if they are drafted to give employers as much discretion as possible.

It has been held that an employer must not exercise his or her discretion capriciously or irrationally when deciding whether or not to pay a bonus and that the employer will be in breach of contract if the decision it reaches, regarding payment of a bonus, is one which no reasonable employer could have come to, even if the employer had a wide discretion under the provisions of the bonus scheme.

It is common for employers not to pay a bonus if an employee is not in employment or is under notice on the date on which the bonus payment is made.

In the Court of Appeal case Commerzbank –v- Kleen (2006) it was held that the burden of proof was on the employee to demonstrate that the level of discretionary bonus payment was irrational or perverse when so much depended on the discretionary judgment of the employer.

The employer was not required to justify the decision unless the employee could establish a case of irrationality, for example, that the employee received a significantly lower bonus than that awarded to comparable work colleagues or no bonus was awarded despite the employee’s success in his team or department. The court held that such a clause is enforceable.

Employers can therefore still use the standard wording to elect not to pay a bonus if the employee is not employed on the date the bonus payment would be payable. Courts will not readily interfere with the amount of a bonus awarded unless an award is inconsistent with that awarded to other employees or no award is made when market conditions are good.

If an employee complains that the bonus amount breaches the employer’s obligation not to exercise its discretion irrationally or perversely, the employee has a high burden of proof to overcome.

Employers must still take care not to terminate an employee’s employment simply to avoid making a bonus payment as this could give rise to a claim of breach of implied trust and confidence.

In Takacs –v- Barclays Service Jersey Ltd (2006) it was held that the employer was not entitled to give notice to terminate the employee’s employment simply to avoid paying a bonus where the continued employment provision was a condition for payment of a bonus.

Employers need to be careful that employees may bring claims regarding the amount of the bonus - based on discrimination and equal pay grounds as well as breach of contract claims. Employers should make notes of the reasons for the decision taken to terminate employment, including redundancy.

Employers should review the wording of their bonus schemes in director’s service contracts and staff employment contracts and take legal advice if they have any doubts.

For further information please contact Andrew Egan on 01793 511055 or andrew.egan@clmlaw.co.uk