We report on a new case dealing with discretionary bonuses and the steps an employer will need to take if not paying.

Background

The Claimant in this case, Mr Hill, had a bonus scheme with his employer Niksun Inc, which appeared to be in very discretionary terms. It did at one point, however, say that “Niksun reserves the right to determine what level of executive compensation, if any, is fair and reasonable under the circumstances”.

Mr Hill claimed that he had been underpaid commission. He was paid at a 48% rate, and he alleged that it should be 100% rate.

If the employer has a discretion about the way they pay bonuses, they still need to act within the bounds of trust and confidence, which is an implied term in every employment contract. With discretionary bonuses, previous cases have decided that this requires them not to make decisions which are “perverse or irrational”. This usually gives employers a wide, but not total, latitude, in the exercise of their discretion.

In terms of perversity/irrationality, the Court will look both at the business decision itself, and also at the process of consideration behind the decision. Niksun could not show that their process of consideration was not irrational because they provided no evidence whatsoever as to their decision making process.

Also, and importantly, because their discretionary bonus plan included the words “fair and reasonable” the Court held that the business was also obliged to decide the bonus fairly and reasonably. Obviously this is a much tougher yardstick than not being perverse or irrational.

It is also important to note that in this case, once Mr Hill had established that he had an arguable case, the burden moved to the employer to show that they had not behaved perversely, irrationally, or, in this case unreasonably.

Mr Hill was therefore successful, and was awarded a two-thirds bonus.

Implications

Businesses need to take care when awarding discretionary bonuses. They will also need to be able to come up with some good reasoning and/or evidence for decision making processes.

This case also acts as a warning to employers not to include any language that is at odds with a very broad discretion in their bonus or commission plans. In this case, Niksun lost, essentially because they included the phrase “is fair and reasonable” in their bonus plan. Employers should try to avoid such wording in future.

 

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Updates: For employers: Contracts and incentives | Staff handbooks |
Tagged with: Bonuses | Pay |

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