Redundant employee awarded discretionary bonus

A recent Federal Circuit Court decision provides a timely reminder that if employers intend to withhold discretionary employee bonuses they should be sure the decision to withhold the bonus is not capricious.

Background

On 15 May 2009, the employee entered into a contract of employment (the Contract) with Westpac. The Contract provided that "… eligibility to be considered for the payment of any invariable reward or incentive payment is at the absolute discretion of Westpac."

The Contract contained a 'Policy' clause which named several specific policies but also provided that these policies did not form part of the Contract. The redundancy policy was not listed in the Policy clause.

Later in May 2009, the employee agreed to participate in Westpac's bonus plan.  The bonus plan's guidelines and rules specified eligibility criteria and the rules for managers in assessing an employee's eligibility. 

The bonus amount paid was linked to the performance of the group, the business unit and the individual employee. The individual employee was measured by a score card rating, which measured their individual performance objectives and target performance levels, consistent with business and team goals, as determined by the employee's manager. 

An employee was required to achieve at least an 'effective' rating for his/her individual performance for the full year to be eligible for a bonus payment.

Westpac's redundancy policy enabled a pro-rata bonus payment to be made to redundant employees, at Westpac's discretion.

The employee received a $70,000 bonus for the 2009/2010 bonus period. 

After a restructure in 2010, the employee's direct report changed. In 2011, the employee's manager downgraded the employee's personal rating from an 'effective' rating to 'needs development'.

On 20 October 2011 the employee's position became redundant and the employee ceased employment 10 months into the 12 month bonus measurement period.

As the employee ceased employment before the end of the bonus measurement period, he was not eligible to receive a bonus payment.  Westpac separately considered, whether it should exercise its discretion under the redundancy policy and give the employee an ex-gratia payment referable to the pro rata period of employment of the bonus year. Westpac decided not to provide an ex gratia payment as the employee had received a 'needs development' rating.

The employee commenced proceedings alleging, amongst other matters, that he was entitled to receive a bonus payment under his Contract and other ancillary documents incorporated into his Contract. 

During the hearing, the employee's manager, made admissions that he failed to follow Westpac's policy, guidelines and rules in relation to the bonus plan and undertook a 'flawed' process. Further, if he had taken the appropriate approach, the employee would have been given a higher performance rating and a real chance of receiving a bonus. 

Findings

The Court determined that:

• Westpac's redundancy policy was incorporated into the Contract by reference to the termination clause contained in the Contract. Further it was "…satisfied that the proper construction of the Employment Contract is that although the relevant policies may not have general application as contractual terms, they do for the specific purpose of determining termination entitlements on redundancy.";
• Westpac in exercising its discretion was not able to withhold the bonus payment 'capriciously, arbitrarily or unreasonably' - rather it was required to exercise the discretion "honestly and comfortably for the purposes of the contract";
• Westpac failed to exercise its discretionary rights properly and in accordance with its policies; and
• the employee was contractually entitled to rely on his bonus entitlement being determined in accordance with those policies. 

The employee was awarded a $70,000 in lieu of a bonus payment and costs.

Lessons

Whether or not a bonus should be paid to an employee is often contested. Even when a bonus plan is discretionary, a Court may find the employee is entitled to the bonus if the decision not to award the bonus is capricious, arbitrary or unreasonable. Employers should ensure that:

• performance criteria are clearly measurable and documented;
• the contract of employment makes it clear that the bonus plan and all other policies (including ancillary documents) are;
  • not terms of, or incorporated into the employment contract; and
  • are not contractually binding.
• employers should undertake a due diligence approach to any related documents; and
• managers and others responsible for exercising discretions in such circumstances, clearly understand and implement the applicable criteria, measurement and process.

If you would like to know more about this case or bonus provisions generally, please contact National Workplace Lawyers on  +61 2 9233 3989.

National Workplace Lawyers

Note — this is for information purposes only and does not purport to be comprehensive or to render legal advice.