In the current market, employees are looking for more than just their basic salary in terms of compensation from their employers.  This could be in the form of benefits like private health care, income protection, life assurance or it may come in the form of a bonus.  While bonuses can be common and often aim to give employers the maximum amount of discretion, it is important to consider some of the common pitfalls in respect of bonuses.

Q: We offer a discretionary bonus scheme in our contract of employment.  We don’t need to pay the employee a bonus under the scheme, do we?

A: It is far more common to see a bonus scheme referred to in a contract of employment that says that award of a bonus will be at the discretion of the employer.  It is rare to see an explicitly contractual bonus provision within contracts about bonuses.  However, that does not necessarily mean that an employer can just refuse to pay an employee a bonus.

One might ask whether the bonus scheme is truly discretionary, or whether there has been a custom and practice of a bonus being paid, meaning there is in fact an implied term in the contract in respect of a bonus.  Obviously it will depend on the exact wording of the scheme, but saying that a bonus is at the employer’s discretion will not always be enough to avoid awarding bonuses.

Further, it has been held that discretion in respect of bonuses must not be exercised in an arbitrary, capricious or irrational way or essentially in a manner in which no reasonable employer would exercise their discretion.

Q: What types of detail should be in a bonus scheme?

A:  Often a bonus can be tied to an employee’s performance, the employer’s financial performance, or both.  It may be the case that certain thresholds need to be reached in order to be eligible for a bonus at all.  The bonus might also relate to just the business unit that they are in or it may be dependent upon the performance of the business across the board.

It is also useful to explain the basis upon which the scheme will be calculated.  That could be a flat amount, a percentage of salary or it might be a figure which is capped at a certain level.

Further, an employer may wish to consider outlining circumstances where a bonus will not be payable.  For instance, where an employee has not worked for the entirety of the relevant work year, employers may wish to either not pay a bonus or alternatively pay a pro-rated bonus.  A common clause would also be to state that the employee has to remain in employment, or that where either party has given notice to terminate then a bonus will not be payable.  This should be tied to the date of payment rather than when the payment falls due.   Depending on the seniority of the employee, it might be worthwhile to consider good leaver and bad leaver clauses.  These are just some of the issues which should be considered when drafting a bonus scheme.

Q: Do we have to pay all our employees the same bonus?

A:  Not necessarily.  The Scheme should outline different criteria (as outlined above) and therefore it may vary person to person.  Where there are differences in what employees are getting, employers should be able to show the objective criteria and calculations that the awards are based upon.  Failing to have clear and objective reasons for differences in bonus awards could give rise to discrimination claims on the basis of the following:

• Gender;
• marital status;
• family status;
• age;
• disability;
• sexual orientation;
• race;
• religion; and,
• membership of the Traveller community.

This should be at the forefront of an employer’s mind where they have employees who have perhaps been on either sick leave or on some type of family leave, like maternity leave.

Q: Can we terminate the scheme at any time?

A: Whilst if you have discretion to terminate a scheme, that might be possible, it will be unlikely that an employer will be able to terminate a scheme to avoid paying a bonus which has already become payable to its employees.

Q: What type of claim could an employee bring if they don’t receive a bonus?

A: It may depend on the level of the potential bonus, but an employee could bring a claim for breach of contract or alternatively bring a case before the Workplace Relations Commission for an unlawful deduction of wages.  This could potentially form part of a broader constructive dismissal complaint as it may be seen as breaching the duty of trust and confidence.

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