Describing a bonus scheme as 'discretionary' may be no excuse for not paying a bonus.

An employee can allege that it is an implied term of the contract that the employer will act with due regard for the purposes of the contract and not act capriciously or unfairly.

Now a landmark case has found an obligation on an employer to set reasonable targets and reasonably assess the amount of bonus.

Landmark bonus case

In 2003, Dr Robyn Lindley commenced a business development role with Silverbrook Research.

Lindley's salary was $210,000 per annum, and her employment contract included an annual performance bonus of $40,000, subject to the following conditions:

  • Silverbrook would assess Dr Lindley's performance against set objectives at the end of each quarter, commencing from the date of her employment. Provided her performance satisfied the set objectives and subject to the condition below, one quarter of the annual performance bonus would be paid to Lindley within 21 days of the end of each quarter.
  • The decision as to whether Dr Lindley should receive the performance bonus was entirely within the discretion of Silverbrook.

Despite the bonus clause, Dr Lindley was never given a chance to receive a bonus as performance objectives were never set. This formed the basis for a breach of contract claim after Dr Lindley resigned from her employment in 2008.

Silverbrook defended the allegations on the grounds that the latter clause clearly gave it discretion over awarding bonuses. A company director told the court that even if performance objectives had been set and achieved, bonuses would not have been granted to Dr Lindley.

The District Court judge accepted that from 2007 (when Dr Lindley's request for a pay increase was denied), the chances were negligible that she would have received a discretionary bonus. However, had the bonus process been followed, there was a 75% chance in Year 1 that the company would have exercised its discretion to pay the bonus, falling to a 60% chance in Year 2 and a 50% chance in Year 3. The value of the 'lost chance' was $74,000 plus interest.

Silverbrook succeeded to some extent on appeal but not on the bonus issues. Allsop P, with whom Beazley JA of the NSW Court of Appeal agreed, found that there may be circumstances where it would be legitimate and conformable with the purposes of an employment contract not to pay a discretionary bonus - for example, if there is financial stringency or misbehaviour by an employee.

What would not be permitted, however, is an unreasoned, unreasonable and arbitrary refusal to pay anything. This would be a denial of the very clause that had been agreed.

Implications for employers

Employers need to be aware that the bonuses and incentive payments that they thought were discretionary may in fact be found by a court not to be discretionary at all.

Although a bonus can be described as discretionary, there may nevertheless be an obligation on employers to set reasonable targets and reasonably assess the amount of bonus.

© DLA Phillips Fox

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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.