Bungling a discretionary bonus

A recent Federal Circuit Court decision provides a timely reminder that if employers intend to withhold discretionary employee bonuses, they should be sure the decision to withhold the bonus is not capricious.

In the case of Russo v Westpac Banking Corporation [2015] FCCA 1086, an employee of a large banking corporation had an employment contract that provided for a discretionary bonus. The eligibility to be considered for the payment of any reward or incentive payment was at the absolute discretion of the employer. The employee’s bonus policy did not form part of his employment contract, however the redundancy policy did.

After the employee commenced work with the employer, they agreed to be a part of the bonus plan, and that bonus plan specified eligibility criteria and rules for assessment of bonuses. The bonus was linked to the performance of various groups, units and individuals, and the individual was measured on a scorecard rating. The employer’s redundancy policy enabled a pro rata bonus payment to be made to redundant employees at the employer’s discretion.

The employee received a $70,000 bonus for the 2009/2010 bonus period. After a restructure in 2010, the employee’s manager had changed. In 2011, the employee’s manager downgraded the employee’s personal rating from “Effective” to “Needs development”. Following the downgrading in performance, the employee was made redundant, but no bonus was paid.

The employer decided on the basis of the redundancy criteria that the employee was not eligible for a bonus payment, because he had received a “Needs development” rating.

As a consequence, the employee commenced proceedings, and at the hearing the employee’s manager, who had downgraded the employee, had made admissions that he did not follow the employer’s policy guidelines and rules in relation to the bonus plan. Critically, it became clear to the trial judge that had the proper process been followed, the employee would have had a real chance of receiving the bonus.

The court found that the bonus was a part of the redundancy entitlement and that the employer had been capricious, arbitrary and unreasonable when it exercised its discretion, had acted in a way that was not honest and comfortably within the purpose of the contract. As a result the employer was ordered to pay the employee a $70,000 payment in lieu of the bonus payment.

Even though the employer was a banking corporation, it’s undeniable that this decision presents lessons for all employers to learn.

Employers should ensure that:

1. Any performance criteria they use is clearly measurable and documented.
2. The employment contract is clear, and should be made clear that bonus payments are not a part of the employment contract, and are not contractually binding.
3. Employers should ensure that their management staff are correctly following procedure and policy in determining and exercising discretions for management processes.

If you have questions about paying bonus payments to employees or any other employment law matter, please contact Chris Morey, Head of Business Law, or Adam Foster, Associate, at Lewis Holdway Lawyers on (03) 9629 9629.