Two recent cases demonstrate the complications that can arise for employers in relation to redundancy policies and discretionary bonus payments. Both cases highlight the importance of ensuring that policies are complied with if they are incorporated into an employment agreement.

Russo v Westpac Banking Corporation1

The facts

Giulio Russo was offered employment with Westpac in 2009. His employment contract specified that in addition to his fixed package of remuneration, he might also be invited to participate in a variable rewards scheme. The contract further provided that Russo’s eligibility to be considered for, and the payment of, any variable reward or incentive payment was at the absolute discretion of Westpac (Bonus  Clause).

Prior to accepting the offer of employment, Russo attended interviews with Westpac representatives during which he was informed that his remuneration would consist of a fixed base component and eligibility to receive an incentive designed to provide competitive remuneration.

During 2009 and 2010, Russo scored well in performance appraisals and received bonuses under the scheme. He was also invited to participate in Westpac’s accelerated leadership program. However, in 2011 Russo’s division was restructured and he started reporting to a new manager, Daniel Musson. Russo and Musson did not develop a good working relationship and following Musson’s appointment, Russo’s performance ratings were downgraded (although Russo was not informed of this at the time).

In September 2011, Russo was told that his position had been made redundant due to a restructure and, after unsuccessful attempts to redeploy him, his employment was terminated in December 2011. Russo claimed that his redundancy package should include a bonus payment for 2011, as the redundancy clause of his contract referred to retrenched employees being paid any money owing to them under Westpac policies. However, Westpac (through Musson) decided to exercise its contractual discretion not to grant the payment, relying on the Bonus Clause.

Russo brought a claim against Westpac in the Federal Circuit Court alleging breach of contract. Westpac argued that the parties had agreed that Westpac would have complete discretion over the grant of payments and that, even if it had an obligation to consider paying Russo a bonus for 2011 under the redundancy clause of his contract, Musson had acted properly in deciding not to make the payment to Russo due to the concerns regarding Russo’s performance.

The decision

The Court held that Westpac’s policy which dictated the granting of performance payments (Bonus Policy) was incorporated into Russo’s employment contract and that Musson, on behalf of Westpac, had incorrectly applied the Bonus Policy.

Incorporation of bonus scheme - did Russo have a contractual right to a bonus?

While Justice Lloyd-Jones recognised that Westpac’s policies did not have general application as contractual terms, his Honour made a distinction regarding the redundancy clause. His Honour focused on the fact that the redundancy clause specifically referred to retrenched employees being paid any money owing under Westpac policies, and found therefore that the parties’ intention was that Westpac’s policies would be applicable in these circumstances.

Exercise of discretion under the bonus policy

Once it was established that Russo had a contractual right to be considered for a bonus for 2011, the second key issue was whether Westpac had complied with the Bonus Policy. Following previous case law in this area,2 the Court held that even where a party is ostensibly granted absolute or sole discretion as to the granting of a bonus, this power must not be exercised capriciously, arbitrarily or unreasonably.

The Court undertook a lengthy examination of the evidence, particularly that of Russo and Musson, and ultimately concluded that Westpac had not properly considered Russo’s eligibility for a bonus arising out of his service in 2011. This was strongly influenced by the fact that Musson accepted in cross-examination that parts of his decision-making process were irrational and unreasonable.

The Court accepted the evidence that if the Bonus Policy had been correctly followed, Russo would have been entitled to a bonus for 2011, as his performance rating would not have been downgraded. His Honour awarded Russo $70,000 (which was the bonus amount he received in 2010).

James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland3

The facts

Following the merger of ABN Amro’s Australian business with the Royal Bank of Scotland in 2008, Angus James’s and Colin McKeith’s positions were made redundant. James was not offered redeployment to a new role. McKeith was offered an alternative position, but did not accept it as he considered the position to be inferior. James and McKeith claimed that they were entitled to severance and ex gratia payments under ABN Amro’s redundancy policy.

James’s and McKeith’s employment contracts specified that they were to be bound by ABN Amro policies. The redundancy policy was a ‘closed’ policy, in that its contents were not disclosed to employees generally.

ABN Amro refused to make redundancy payments to James or McKeith in accordance with the policy unless they agreed to execute a deed of release in favour of ABN Amro. James and McKeith commenced proceedings against their former employer, arguing they had a contractual right to the amounts specified in the redundancy policy and that ABN Amro could not impose an extra requirement that they execute a deed of release in order to receive these entitlements.

The decision

James

The Court held that, even though the redundancy policy was not openly distributed, it was nonetheless incorporated into James’s contract. Justice McDougall accepted evidence that James had specifically discussed the redundancy policy with ABN Amro at the time of signing his contract and considered that, when read objectively, it was clear that the clause of the redundancy policy referring to severance and ex gratia payments was intended to impose obligations on both James and ABN Amro.

Consequently, James was awarded $2,932,692.31 owing under the redundancy policy, plus interest from the date of his retrenchment.

McKeith

In contrast to James, McKeith was found not to be entitled to any payment, as he turned down an offer of redeployment to an alternative role.

Furthermore, McKeith was unable to establish any relevant evidence from which it could be inferred that the redundancy policy was incorporated into his employment contract. Accordingly, he was not entitled to any payment under the policy.

Bottom line for employers

  • Employment contracts should contain express words excluding policies from providing contractual entitlements, if that is the intention.
  • Employers should carefully consider what is included in their company policies, including “closed” or unpublished policies which are used as internal guidelines by Human Resources practitioners. Such documents would  be discoverable in any legal proceedings and may give rise to enforceable contractual entitlements.
  •  Employers may still be required to pay discretionary performance bonuses when an employee is made redundant.
  • Express statements that bonus or incentive payments will be at the “absolute” or “sole” discretion of the employer will not permit a procedurally unfair, capricious or arbitrary exercise of that discretion by the employer.