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June 13 2018
Picture this: the paperwork has been signed, the champagne has been popped, and the deal team is still reeling from securing its largest acquisition in years when senior management announces that the multimillion-dollar deal will be excluded from the office's bonus pool for the financial year. Further, management is introducing a new incentive scheme effective immediately, whereby:
The facts in this scenario are based on those in Crowe Horwath (Aust) Pty Ltd v Loone, which was heard by the Supreme Court of Victoria in 2017. Following a claim made by former employee Anthony Loone, the court held that the business's conduct amounted to a fundamental breach (or repudiation) of the employment contract and awarded Loone A$423,445 in damages, including A$142,778 in respect of his unpaid bonus entitlement. The decision was made despite a clause in the employment agreement which stated that the company would determine "at its absolute discretion" the amount of any bonus payment to be made to the employee.
This update sheds light on how absolute an employer's absolute discretion is when it comes to bonuses and incentive payments, and provides tips for avoiding claims of breach.
One question that clients regularly ask – particularly at the end of the financial year – is how discretionary is an employer's discretion when it comes to awarding a bonus or setting an employee's annual remuneration?
As with most legal issues, there is no quick answer, but there are some tips from case law which can provide guidance.
The scope of an employer's discretion depends on the wording of the employment agreement or bonus plan in question. It may be tempting to see words in an employment agreement such as "any incentive payment will be paid at the employer's absolute discretion" as a 'get out of jail free' card. However, case law shows that regardless of the language included in writing, an employer cannot exercise its discretion capriciously, unreasonably or arbitrarily. Instead, its discretion must be exercised legitimately, honestly and comfortably within the objectives of the agreement.
The clause or agreement may also include particular criteria which places additional limits on the business's discretion. In Crowe Horwath the court held that while the wording of the bonus clause gave the company absolute discretion as to the quantum of any bonus payment, the exercise of that discretion was subject to the next part of the clause, which stated that "[t]his amount will be determined by consideration of various performance parameters" and listed a number of factors to be taken into account. Ultimately, the court held that this did not entitle the company to exclude Loone's significant performance in the deal from its assessment of his overall personal performance.
Check the bonus clause or scheme is up to scratch
Employers considering what sort of discretion they have in awarding or not awarding a bonus or incentive payment should check the wording of the employment agreement clause or bonus scheme in question. Some written agreements may not even have a clause stating that the payment is at the employer's absolute discretion, which can give the employee an unfettered contractual right to the payment. If this is the case, the employer should consider inserting wording to the effect that any bonus or incentive is at its absolute discretion. It should also check whether there are certain criteria that must be considered when determining the payment (eg, personal or company performance). These factors should also be subject to the company's absolute discretion.
Follow procedure in determining and exercising discretion
Employers should correctly follow procedure and policy in determining and exercising discretion. For example, if the procedure requires an employer to have regard to an individual's performance, any performance criteria that it uses should be measurable and clearly documented in regard to that person.
Obtain solid evidence for any reduced payment or non-payment
If an employer refuses to pay a discretionary bonus or incentive payment (or makes a lower payment than may be anticipated), there should be clear evidence of the reasons that payment was not made (eg, poor performance or misconduct) in order to minimise the possibility of a claim that the exercise of the employer's discretion was capricious, unreasonable or arbitrary. Where possible, the employer should also provide an opportunity for the employee to comment before the non-payment or reduced payment is made.
Navigating the payment of bonuses or incentive payments can be a tricky legal issue. Obtaining a second opinion on the scope or parameters of an employer's discretion may be essential before flexing and exercising such discretion.
For further information on this topic please contact Aaron Goonrey at Lander & Rogers' Sydney office by telephone (+61 2 8020 7700) or email (email@example.com). Alternatively, contact Emily Burgess at Lander & Rogers' Melbourne office by telephone (+61 3 9269 9000) or email (firstname.lastname@example.org). The Lander & Rogers website can be accessed at www.landers.com.au.
An earlier version of this article was first published in HRM Online on March 20 2018.
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