Care over discretion

You may have reserved in your contracts an amount of employers’ ‘discretion’ when it comes to eg. deciding what somebody’s bonus should be or if sick pay applies, or whether somebody is a good leaver with regards to share options. You have no doubt wanted to give yourself freedom to manoeuvre whilst doing this. You may also be wanting to be able to argue that the benefit is non-contractual.  

Care is needed regarding the wording used.  A perfect illustration is a case where an employer operated a commission scheme and the Sales Director was given a discretion to reduce the potential bonus to nil “if required, although such cases will be by exception only and require HR and Finance agreement”.  When the employee concerned substantially over-performed and achieved an unprecedented level of bonus, the Court of Appeal found that the employer was not able to cap it.  The words “by exception only” meant the cap could only be used in exceptional circumstances, not merely as a convenient alternative to a timely review of the target.  As the employer did not review the target and the scheme was designed to encourage and rewards success, the degree of success could not itself be regarded as an exceptional circumstance.  The employee was therefore entitled to receive her full commission.

You may also have asserted in your documentation that this does not form part of your “contractual remuneration” or simply refer to the bonus as being “discretionary”. Using that adjective to describe the benefit is unlikely to be sufficient, because it remains unclear precisely what is being left to the employer’s discretion. Does this relate to the decision to pay a benefit, how to calculate it, the amount of it or all or none of those matters?

If you have sustained a consistent practice around making payments on a discretionary basis over time, you may have created an implied contractual entitlement.  For example, in one case a bonus had been paid every year for 4 years and was now contractual.

You may also have contradicted what you have said.  You may have written one thing down in the contract and then issued other paperwork around the bonus for example, using different language, that a Tribunal might find was contractual.  For example, there have been cases where an employer has made an oral announcement around a “guaranteed bonus pool” talking around guaranteed minimums distributed “no matter what”.  They have then found themselves tied to that.

Discretion is also regulated by implied terms (mutual trust and confidence). This makes you have to act in a rational way, in good faith and in a non-arbitrary manner.  If you act irrationally in a perverse way or capriciously you will have breached the employees’ contract and they will have the right to claim constructive dismissal and be released from their restrictive covenants.

Your decision-making process is subject to potential judicial scrutiny – can you show that you have taken into account the right matters when reaching a decision? Have you even documented your decision-making process? Is the result so outrageous that no reasonable decision-maker could have reached it?  If so, your exercise of discretion would be unlawful.