Discretionary bonus schemes – can an employer deny payment?
Many Australian workers participate in employee incentive schemes designed to deliver a performance bonus if the employee achieves set objectives or targets over a certain period. A common dispute arises when a performance bonus is not paid due to a “discretion of the employer” clause in the Bonus Scheme Rules, a workplace policy or employment contract.
In this blog, we look at the situation where your employer refuses a ‘’bonus’’ payment on the basis of the “employer’s discretion” and what your options are.
Bonus schemes are supposedly used to motivate, incentivise and influence employee behaviour. Often, an employee will be employed on a base salary and a bonus that will or, more problematically, may be payable if the employee (or the business) satisfies certain performance criteria set out in company policy or in an individual employment contract.
Has your employer denied payment of your performance bonus?
Reference to bonuses in your employment contract (or in company policies) may mean that you have:
- an absolute entitlement to the bonus if you (or the business) meet certain criteria; or
- through a more complex arrangement, a right to participate in a “discretionary” bonus scheme where some components of the scheme are yet to be determined and may be modified from time to time.
Bonuses can take many forms, from cash payments to awards of various types of equities in the business. They can be based on your contract, employer policies, or Incentive Plans with complex rules.
There can be complexities for a breach related to any of the above, and it’s crucial that employees who have had a ‘’bonus’’ denied by the employer seek advice early from a lawyer experienced in employment law.
1. An absolute entitlement
An absolute entitlement to a performance bonus is where the employment contract guarantees the payment of a certain amount to an employee subject to the employee meeting certain individual performance criteria. The employer has no discretion to withhold payment.
Here’s an example:
In addition to your base salary, you will be paid a financial bonus of 10% of gross sales above $250,000 in each financial year. This amount will be payable in the first pay period after 30 June of each year. The bonus will be paid pro-rata if you do not complete a full year of service with the company.
In this category, when the criteria is met, you are entitled to the payment, and it is a breach of contract for the employer to refuse to make payment, all else equal.
However, most bonus schemes are not as simple as the example and frequently purport to be discretionary or may be contingent on such things as the overall performance of the business. The devil is inevitably in the detail of the contractual terms governing your particular bonus scheme or entitlement.
Case review: breach of contract with an absolute right to a bonus
The Full Federal Court’s decision in Walker v Citigroup Global Markets Australia Pty Ltd (2006) 233 ALR 687;  FCAFC 1001 remains a poignant example for employers who may unlawfully terminate an employment contract containing an absolute right to a bonus payment.
Mr Walker was employed in a senior research role with an investment bank when he was headhunted by Salomon Smith Barney (‘SSB’). SSB offered him a position of Resources Analyst for a $275,000 annual salary for the first year, accompanied by a “guaranteed minimum bonus of $250,000” and a subsequent promotion at that time.
Due to the notice period with his current employer, among other things, the parties arranged for the position to commence sometime later and agreed on certain contractual terms.
Shortly before Mr Walker’s employment with SSB was due to commence, they underwent a merger with Citigroup, and Mr Walker’s employment contract was terminated.
Accompanying the letter of offer Mr Walker and SSB had exchanged were standard form contractual terms which contained, among other things, a one-month termination clause.
For the purposes of this article, the relevant issue was whether Mr Walker was entitled to the guaranteed minimum annual bonus.
The Full Federal Court held that he was because:
- in interpreting the employment contract, where a precise offer has been made by an employer that is accompanied by generic standard form contractual terms, the parties intended the specific to override the general;
- the parties must have intended the term providing for one month termination without cause to only apply after the first year had been served; and so
- it followed that Mr Walker was entitled at the very least to the 12-month salary and the accompanying absolute bonus entitlement.
The Court assessed damages in respect of the first year of Mr Walker’s employment at $586,806.00 (including interest).
As an additional matter, the Court found that merely because Mr Walker may have been terminated on one month’s notice after that time, in the circumstances, he would probably have remained in the new role for several years but for the repudiation. And so, he was awarded further compensation for that assessed period – an additional $2,346,553.00.
2. A discretionary bonus
A discretionary bonus is not as black and white. This is where the employment contract promises the payment of a certain amount subject to meeting the criteria and the employer deciding to give the bonus.
For cases falling within this category, it may be a breach of the contract for the company to refuse to pay the bonus where the employee has met the contractual criteria, and the employer exercises their contractual discretion unreasonably, capriciously or otherwise improperly. In the ordinary course a contractual discretion of this nature will be improperly exercised when done for a purpose inconsistent with the scope that the parties intended the discretion to have when they made the agreement.
This category becomes clearer through the below case review.
Case review: bonus withheld unlawfully
The New South Wales Court of Appeal’s decision in Silverbrook Research Pty Ltd v Lindley  NSWCA 357 is an important case on the exercise of discretion.
In this case, Dr Lindley’s contract relevantly provided that, subject to her performance being assessed against objectives to be set by her employer, she would be entitled to a $40,000 annual bonus.
One of the problems Dr Lindley faced was the fact that the company did not set any objectives or goals. The company effectively submitted to the court that Ms Lindley could not be entitled to the performance bonuses because she could not possibly meet targets which did not exist and, in any event, the contract provided it was “entirely within their discretion”.
In determining this element of the dispute in Dr Lindley’s favour, the reasoning that may be distilled from the majority of the Court is that:
- the employer had a contractual obligation to set performance scheme targets;
- though there was a contractual discretion as to what those targets may be, the scope of that discretion must be understood in line with the proper scope and purpose of the contract;
- that proper scope and purpose relevantly entailed rewarding employees for their service to the company;
- it followed then that any setting of performance-based targets must be done honestly and in conformity with this purpose;
- an arbitrary or capricious withdrawal of a target or the bonus would be impermissible in the contract even if the targets had been set;
- the fact that Dr Lindley had a specific bonus entitlement upon meeting the discretionary targets was a valuable part of the overall remuneration package, and so the employer would not have had a discretion to set targets which, on the objective evidence, would have been unachievable;
- the employer has breached the agreement and, given the competency of Dr Lindley as an employee, it could be inferred that had the company set the targets within the bounds of their lawful discretion, then Dr Lindley would have met those targets.
Dr Lindley was awarded compensation in the amount of over $53,000.
Remedies available if your performance bonus has not been paid
There are a number of remedies available to employees who have been denied payment of a performance bonus. The type of remedy is determined by the specific facts of each individual case. We will look at three options.
1. Breach of employment contract
Where an employer has unlawfully withheld a bonus in breach of an employment contract, the employee is entitled to be put into the position that they would be in had the contract been properly performed.
Generally, this will at least entail compensating the employee with payment of the bonus that they ought to have received.
However, as the case of Walker v Citigroup discussed above illustrates, where the breach depriving the employee of the bonus also deprived them of the probability that they would have remained in employment, then further compensation may be ordered.
2. General protections claim
- the employee made a complaint that their bonus entitlement has been withheld or that the exercise of their employer’s contractual discretion has been unfair or improper;
- the employee made an inquiry as to why the employer set the bonus objectives so high because they seem unachievable.
Where an employee has not been paid a bonus or has had a discretionary bonus exercised differently to their peers because of that employee’s race, sex, gender, or other characteristic protected by section 351 anti-discrimination provisions, which also form part of the general protections regime, then that will also constitute unlawful adverse action.
Where an employer breaches the Fair Work Act’s general protections, the court has an expansive compensatory jurisdiction to provide the employee with a remedy. Depending on the circumstances, employers may face civil penalties for the breach as a deterrent, which may be made payable to the employee.
3. Section 31 of the Australian Consumer Law
The Australian Consumer Law may also provide a remedial avenue for an employee who has relied upon an employer’s representation that they will be paid a bonus, particularly if the employee has relied upon the representation to their detriment.
Section 31 renders unlawful conduct which, in relation to employment being offered, is liable to mislead persons seeking employment as to, relevantly:
- the terms and conditions of the employment; or
- any other matter relating to the employment.
This section is an important protection for employees who may have left one place of employment acting on, for example, a recruiter’s promise of an attractive bonus remuneration package. Notably, an alternative argument was made by Mr Walker (in the above case review) under a predecessor of this provision.
The basis of the remedy awarded under this section does not ensure that the employee receives the benefit of the representation that they relied upon (for example, payment of the performance bonus) but involves a comparison between what position the employee would have been in had the unlawful conduct of the employer not occurred.
Get help from an employment lawyer
Many employers will rely on their “discretion” to deny payment of a bonus. However, the employer cannot simply choose arbitrarily, capriciously or unreasonably not to pay the bonus where the set objectives have been satisfied.
The law around non-payment of performance bonus entitlements can be complicated and can also often raise more complex issues. Employees may have been unlawfully terminated or have suffered reputational damage.
If your performance bonus has been denied, it is crucial that you seek legal advice early. Our award-winning employment law team can assist you.
Contacting Hall Payne Lawyers
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This article relates to Australian law; either at a State or Federal level.
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your particular circumstances. For further information, please do not hesitate to contact Hall Payne Lawyers.
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