The issue of discretionary bonuses and allowances were recently considered in the context of the Payment of Wages Act 1991 (“the 1991 Act”) in the case of Cleary & Others v B&Q Ireland Limited (High Court, 8 January 2016).

Details of the case:

Ten employees of B&Q Ireland Limited (“the Employer”) claimed that the Employer’s decision to withdraw a winter/summer bonus, as well as a zone allowance paid to employees working in Dublin stores, was in breach of the 1991 Act.

The employees’ contracts of employment stated that “all bonus schemes are discretionary and are subject to scheme rules. They may be reviewed or withdrawn at any time.” The Employer argued that unilaterally withdrawing the bonus scheme was permitted by the terms of the scheme and the employment contract which expressly provided that it could be withdrawn at any time. The Tribunal agreed with this argument and found that there was no breach of the 1991 Act.

In relation to the zone allowance paid to employees working in Dublin stores, the Tribunal followed the case of McKenzie & Anor v Minister for Finance & Ors [2010] IEHC 461 and found that the allowance was separate and distinct from the employees’ salary, and could be considered compensation for working in a particular area. The deduction of an allowance is not a deduction from wages under the 1991 Act.

The decision was appealed to the High Court where the employees argued that they should have been entitled to the first bonus following the decision to end the bonus scheme, as it related to a period of work already done and the employees had accrued the bonus at the time the decision was made to withdraw it. The employees also argued that the zone allowance was an intrinsic part of the wages payable to employees contracted to work at the Dublin outlets.

In relation to the bonus scheme, the High Court noted that the Employer had the discretion to withdraw the bonus scheme at any time, however, it held that discretion should be exercised reasonably. The Court found that the Tribunal erred in law, in interpreting the Employer’s discretion to withdraw the bonus scheme at any time, as applying retrospectively. The Court also held the payment of the bonus crystallised as a contractual obligation once it was earned in accordance with the terms of the scheme and that the employees had worked the relevant period pursuant to the relevant scheme and therefore accrued a bonus entitlement under the scheme.

In relation to the zone allowance, the Court noted that the Tribunal found that the mileage allowance was an expense under section 7(2)(b) of the 1991 Act and the Court was satisfied that the zone allowance was also an expense and did not constitute wages for the purposes of the 1991 Act.

What this means for employers?

This decision reaffirms the position that allowances are not wages for the purposes of the 1991 Act and also serves as a reminder that simply describing a bonus scheme as discretionary will not always prevent a contractual entitlement arising. Employers looking at varying or discontinuing a discretionary bonus scheme should seek legal advice before doing so.