Ad Hoc Payment of Employment Bonuses Can Be a Recipe for Dispute

Posted: 11th August 2020

Employment bonuses are often paid on an open-handed ad hoc basis without regard to formality. As an employment case strikingly showed, however, such arrangements tend to create high expectations which cannot easily be met during downturns in business.

PayslipThe case concerned a senior employee of a company that provided VAT-related services to corporate clients. His contract contained a bonus clause which stated that he was entitled to a maximum annual bonus of 20 per cent of his salary which would be tied to his personal performance and that of his marketing region.

Whilst the company’s business thrived, he was not set specific performance targets and was paid bonuses on an ad hoc basis which far exceeded the contractual ceiling of 20 per cent of salary. After the business hit financial difficulties so serious as to threaten it with insolvency, however, he was informed that he and other managers would receive no bonus in that financial year.

Despite the company’s financial crisis, the part of the business for which the man bore responsibility had continued to do well. He took the view that he was entitled to receive a bonus of at least £55,000, in line with previous years. When the company stuck to its guns, he resigned on the basis that the failure to pay him a bonus amounted to a repudiatory breach of his employment contract.

After he launched proceedings, however, an Employment Tribunal (ET) rejected his complaints of breach of contract and constructive unfair dismissal. It found that, on a true reading of the bonus clause, payment of his bonus was discretionary. His own performance was not the sole relevant factor and the company was entitled to take account of the parlous financial position of its business as a whole. The refusal of a bonus was nether irrational nor perverse.

Ruling on the man’s challenge to that outcome, the Employment Appeal Tribunal (EAT) agreed with the ET’s interpretation of the bonus clause. It noted, however, that the ET had made a factual error in calculating the percentage by which the man had fallen short of his budgetary target in the relevant financial year. The ET found that the shortfall was approaching 50 per cent, whereas it was in fact less than 6 per cent. That error was material and might have affected the ET’s conclusions on whether refusing the man a bonus was rational.

The ET was also not justified in finding that, unless he were paid a bonus of close to £55,000, the man would have resigned anyway. The case was remitted to a freshly constituted ET for reconsideration of issues arising from the EAT’s ruling. The EAT found that resolution of those issues would not require a complete rehearing of all the evidence in the case.