The Cleary case came before the High Court by way of an appeal under the Payment of Wages Act 1991. The Appellants were employees of B&Q. They challenged the employer’s retrospective discontinuance of a bonus scheme and the withdrawal of a 'zone allowance' payable to staff at three Dublin outlets in recognition of the higher cost of living in Dublin.

The case is of importance for its consideration of three questions:

• What does the word ‘discretionary’ mean when used in a bonus scheme?
• If a contract permits unilateral variation of the contract by the employer, does that mean that the employer can make a variation with retrospective effect?
• What is an ‘expense’ within the meaning of the Payment of Wages Act 1991?

Unilateral Variation; Nature of Discretion: Bonus

Under the bonus scheme, employees with at least six months service were entitled to a bonus of 3% of basic pay, payable in June and based on the pay earned in the previous August – January trading period. They were entitled to a further 3% of basic pay, payable in November and based on the pay earned in the previous February – July period of trade. The bonus was not contingent upon satisfactory performance by the employee or any other specified conditions and it was not specifically linked to the profitability of the company.

One group of employees was employed pursuant to contracts which provided that the employer 'may amend or vary your terms of employment from time to time and these variations are amendments will be posted on the staff notice board if the change is minor or in writing if the changes more substantial'. The other group of employees was employed pursuant to contracts which provided that 'details of the other terms and conditions of employment are given in the employee handbook. Any changes to the above details will be notified to you directly.' The employee handbook stated in bold 'all bonus schemes are discretionary and are subject to scheme rules. They may be reviewed or withdrawn at any time.'

In January 2012 the employer announced the withdrawal of the bonus with effect from 1 April 2012.

The Employment Appeals Tribunal determined that the employer was entitled to withdraw the bonus scheme unilaterally. The employees appealed, arguing that the bonus payable in June 2012 was referable to a period which the employees had already worked, i.e. August 2011 to January 2012 and could not be the subject of a retrospective withdrawal. The employees had already provided consideration by their work over that period and had therefore earned the bonus which could not be retrospectively and unilaterally withdrawn.

The employer argued that the bonus was not 'declared' by the employer for the period from August 2011 to January 2012. It argued that the contracts were clear and unambiguous in respect of the discretionary nature of the bonus payment.

McDermott J in the High Court held that the bonus scheme clearly operated on a basis that did not require that the bonus be 'declared'. The contract of employment and bonus scheme must be interpreted reasonably and in the overall context of the contract.

The employer had a wide discretion under the terms of the contract and scheme to withdraw the scheme. That discretion must be exercised reasonably. If the discretion is exercised unreasonably the employer will be in breach of contract. Having regard to the fact that the employer was obliged to seek examinership and that it was clearly in a very difficult financial situation, decision to withdraw the bonus could not be regarded as unreasonable.

However, the employer was only entitled to withdraw the bonus scheme with prospective effect. The discretion to withdraw the bonus scheme at any time was always intended to apply to the conferring of bonuses, as yet unaccrued, under the terms of the scheme. The terms of the bonus scheme properly interpreted did not allow for the unilateral withholding of a bonus payment in respect of the period worked by the employee during which the employee had a legitimate expectation that the bonus was accruing and would be paid. For this reason, the bonus for August 2011 to January 2012 was properly payable in June 2012 notwithstanding the withdrawal of the scheme in January 2012.

What is an ‘Expense': ‘Zone Allowance’

Section 1 of the 1991 Act (1)(i) provides that any payment in respect of expenses incurred by the employee in carrying out his employment is not be regarded as ‘wages’ under the 1991 Act.

The ‘zone allowance’ was an amount paid to employees in Dublin in recognition of the higher cost of living in Dublin. The employment appeals Tribunal held that the ‘zone allowance’ constituted an expense and that therefore it did not constitute 'wages' under the Payment of Wages Act.

McDermott J acknowledged that the 'zone allowance' was clearly not payment in respect of expenditure by an employee in carrying out the duties of his or her employment which is then to be recouped from the employer and nor did the employer ever claimed that it was. However the employer asserted that it was to be regarded as an expense based upon a wider definition than that of the more familiar 'vouched' expense.

McDermott J referred to the UK case of London Borough of Southwark v O'Brien [1996] IRLR 420. In that case a mileage allowance had been withdrawn. The industrial tribunal determined that the allowance constituted wages because it provided benefits over and above an expense actually incurred. The UK Employment Appeal Tribunal overturned that decision. It held that it is not necessary for the employer to show that what he has paid is precisely a reimbursement of the sum expended by the worker. The Employment Appeal Tribunal concluded that the mileage allowance was an expense under the relevant section of the UK act.

McDermott J adopted the same approach to the interpretation of section 1 (1) (i) of the 1990 Act. He held that there was a sufficient evidential basis upon which the Tribunal was entitled to make its findings of fact in respect of whether the payment was an expense or not and it had not been established that these findings were unsustainable. It had adopted the correct interpretation of the nature and extent of expenses covered by section 1 (1) (i) similar to that applied in the O'Brien case. He held that the Tribunal did not err in law by so doing.

McKenzie v Minister for Finance

McDermott J also considered the case of McKenzie v Minister for Finance [2011] 22 ELR 109. In that case, Edwards J observed that the reduction of the motor travel allowance and subsistence payment under consideration in that case was not a ‘deduction' from wages for the purposes of the Payment of Wages Act. McDermott J noted that these observations were obiter dicta, i.e. not part of the ratio of the case and therefore not binding upon lower courts or tribunals. McDermott J appeared to disagree with the dicta and made it clear that if the ‘zone allowance’ under consideration by him was payable as part of the employees' wages pursuant to contract, the withdrawal of the allowance would clearly be an unlawful deduction under the Act. However, the 1991 act has no application to the reduction of an allowance properly classified as an expense because it is clearly not a deduction from wages.

Comment

This case is of particular interest because of the stress it lays upon reasonableness. The contract and bonus scheme are to be interpreted reasonably. The employer’s power to withdraw the bonus scheme is to be exercised reasonably. Properly interpreted, the power to withdraw the bonus scheme could not operate so as to withhold a bonus from an employee in respect of the period worked by the employee during which the employee had a legitimate expectation that the bonus was accruing and would be paid.

The case is also noteworthy for the broad definition of ‘expense’ endorsed by the High Court, embracing as it does monies paid in recognition of a higher cost of living in certain areas.

It is also noteworthy for the manner in which it addressed McKenzie, diverging from the obiter dicta in that case.