Discretionary bonuses: a workplace right?
Is a promise of a bonus at the discretion of management an entitlement to a bonus?
Many employees work in workplaces where there is a bonus scheme available to the workforce or part of the workplace. The value of this to the employer is self evident; it is an incentive to be productive which will benefit the employer. However it is also common for employers to hedge their bets and try and endeavour to make the awarding of such rewards to be at the discretion of management. This is not a problem whilst all of the employees accept that the benefit of the bonus scheme to them depends collectively and individually upon performance and objective results for the employer.
However there are two contexts in which the issue can be, to say the least awkward. The first is the participation in the bonus scheme by employees who for whatever reason leave the employment but feel that they have contributed to the generation of it by work undertaken before his or her departure (whether pro rata or not) and the second is where employers take advantage of an employee’s departure to simply save money.
The law on this subject lies fairly and squarely in contract law, and the employee’s entitlement will depend almost entirely upon what his or her contract or the employer’s policies say about the issue.
There are a number of fundamental legal principles which cover the issue.
The first is that the fact that an employer expressly describes the scheme , and any benefits pursuant to it, as “discretionary” or “at the discretion of management” or words to similar effect will not entitle the employer, through management, to manipulate the allocation of a share of the collective bonus “capriciously, arbitrarily, irrationally or perversely” and thus discriminate against employees or former employees, who all else being equal, are on merit just as responsible for the generating the conditions for the bonus to be available.; see Silverbrook Research Pty Ltd v Lindley  NSWCA 357 and Eshuys v St Barbara Limited  VSC 125. Australian Courts have been quick and consistent to imply into contractual arrangements an entitlement to have employers manage the distribution of such a bonus in a fair and equitable way by rendering unlawful the “capricious, arbitrary, irrational and perverse” discrimination.
The second is that Australian courts are also quick even in the absence of an express contractual entitlement to participate on such a bonus to imply the existence of a “discretionary bonus” as a contractual entitlement if there is the slightest coherent legal reason to do so from the employer’ custom and practice or policies.
Although there is some forensic debate in Australian legal circles (see previous blogs on this issue) about whether and in what circumstances an employer’s policies will constitute a contractual entitlement or right, my view is that it will take very little for an Australian court to elevate an employer’s policies about participation in a discretionary bonus scheme to a contractual entitlement, whether or not the employee remains in employment.