Are bonus payments at an employer’s discretion?

28 April 2021

This article was first published by People Management,  you can also read in full by clicking here.

In light of a recent EAT ruling, Nadjia Zychowicz and Eugenie Freeman discuss whether a high-performing employee should be awarded a bonus if the business is at risk of insolvency.

Background

The claimant in Ostilly v Meridian Global VAT Services (UK) Ltd, worked as a strategic business adviser, and later as a commercial director, for Meridian Global VAT Services (UK) Ltd – a company who provided VAT-related services to corporate clients. 

Mr Ostilly’s contract stated “[...] you will be entitled to a maximum annual bonus of 20 per cent of your salary which will be tied to your own performance and that of your market region. Further details on the bonus system will be forwarded to you shortly.” 

The ‘market region’ meant the geographical areas in which the company operated. This did not apply to the sector of the business Ostilly worked in at the time of his claim. The contract did not state that the bonus was discretionary. 

Ostilly was never sent further details on the bonus system, nor was he ever set specific performance targets. However, he was consistently awarded high bonuses, well over the stated maximum entitlement of 20 per cent of his salary. His bonuses ranged from £28,000 to £45,000 up until 2010. 

Ostilly started working in a different sector of the business in 2010 and did very well. His sector consistently made high annual profits, and in 2016, Ostilly was awarded a bonus of £55,000. However, the business as a whole was suffering serious financial difficulties and was on the brink of insolvency. As a result, the company decided to withhold bonuses for all employees in 2017. 

Ostilly resigned and brought a claim for constructive unfair dismissal and breach of contract. 

Factors taken into consideration

The employment tribunal (ET) found that Ostilly’s employer was entitled to take account of the financial position of its business as a whole, not just his own performance and that of his market region (if he had one), as stated in his employment contract. The company’s refusal to pay the bonus was therefore a lawful exercise of discretion and not perverse. 

Ostilly appealed to the Employment Appeal Tribunal (EAT) arguing that the ET was wrong to interpret the bonus clause as allowing his employer to consider its own financial performance when deciding on bonus payments. 

The EAT agreed with the ET’s interpretation of the bonus clause. It held:

That the company’s financial performance was a sensible and commercial consideration in deciding the level of bonus payments to be made;

To restrict the employer’s discretion to considering only the claimant’s performance would be ‘uncommercial’; and

The phrase 'tied to your own performance and that of your market region' did not have to be read as requiring that discretion to be exercised as an abstract exercise, in a commercial vacuum.

Take away points 

It is likely to be relevant and permissible for an employer to consider its own financial position and stability when deciding on bonus payments, even where this element of discretion is not expressly stated to be a factor for consideration in any contractual wording. This may be particularly helpful for businesses whose financial stability has been knocked by the Coronavirus pandemic. 

As the wording of the contract will always be the first reference point, it is also noteworthy that this messy and expensive legal battle could well have been avoided if the employment contract had been well drafted and clearly had stated that the bonus was non-contractual and discretionary. 

Nadjia Zychowicz and Eugenie Freeman are associates in the employment team at Kingsley Napley LLP.

FURTHER INFORMATION

If you would like any further information or advice about the issues explored in this blog, please contact a  member of our employment team

 

ABOUT THE AUTHOR

Nadjia has versatile experience supporting corporate and education sector clients as well as senior executives in a broad range of employment law matters.

Eugenie often advises individuals in difficult situations, including those facing redundancy or having suffered discrimination.  She acts for a mixture of corporates and private individuals. Eugenie’s experience includes advising on dismissals, negotiating settlement agreements, advising on contractual disputes, including the enforceability of post-termination restrictions and drafting employment contracts and staff handbooks.

 

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