Employers may withhold discretionary bonuses even where performance is satisfactory

18 January 2012 |

When determining whether to award a discretionary bonus or not the
key issue for the Courts to look at is whether the employer’s decision
was irrational or perverse and not whether the employees performance was
sufficient to justify a bonus.

Legal Position

Where a bonus scheme is discretionary the employer does not have a
complete discretion over whether to refuse to award a bonus.  The
employer cannot exercise his discretion in a way which is irrational or
perverse.

Case Summary

In this case an employee’s bonus was related to his performance, as
determined by the management board.  During the 3 years preceding the
year in question the employee had received a good appraisal and
substantial bonuses.  In the year in question the employee’s fixed term
contract came to an end and he received no bonus and he subsequently
brought a claim against his former employer for payment of a sum
equivalent to his bonus.

The employee was an economist and he was responsible for forecasting
nickel prices.  In the year in question his forecasts were badly wrong,
although no more wrong than that of other leading economists, as a
result of the global economic crisis.  As a result of this inaccurate
forecast the employer made a significant loss and the employee received
an unsatisfactory performance rating.

It was held that in the circumstances the employer’s decision not to
pay a bonus was not irrational or perverse.  The employee was not
permitted to use the failings of other economists or the global economic
crisis as a justification for his entitlement to a bonus.

Commentary

It is interesting to note that the court held that the global
economic crash should be taken into account when determining whether the
employer’s discretion had been exercised rationally.  This appears to
conflict with previous decisions of the Court of Appeal and the High
Court which had held that the global economic crisis was not relevant in
determining employees’ contractual bonus entitlement.

Resources

Humphreys v Norilsk Nickel International (UK) Ltd [2010] EWHC 1867 (QB)

For further information or to discuss the issues raised, please get in touch.

Disclaimer

Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.

Circular 230 disclosure

To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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