Recent decisions of the Australian Courts have highlighted the limits, in the form of an implied term, on an employer’s contractual discretion to award bonus payments.

Decisions such as Russo v Westpac Banking Corporation [2015] FCCA 1086 have confirmed that, notwithstanding an express term in the employment contract that any bonus is payable at the employer’s absolute discretion, an employer must exercise this discretion:

  • in a manner which is not “capricious, arbitrary or unreasonable” having regard to the proper scope and content of the contract; and
  • after complying with the other express terms of the contract relating to the payment of any bonus (eg, requirements regarding the performance review process or considering the satisfaction of key performance indicators).

Care also needs to be taken to comply with any policies regarding the payment or calculation of bonuses which may have contractual force. The Court has found that employee bonus policies referred to in an employment contract were incorporated into the terms and conditions of employment and had contractual force, notwithstanding express wording in the contract to the contrary.

When considering whether to award a discretionary bonus, we recommend that employers:

  • correctly apply criteria for determining employee eligibility for any bonus;
  • comply with any procedural requirements relating to the bonus contained in the employment contract or under an applicable policy referred to in the employment contract;
  • maintain evidence of decision-making procedures followed to determine the bonus payment or non-payment;
  • ensure there is a sound business case to support not awarding a discretionary bonus; and
  • have clear communications ready to address queries from employees, as this is often an issue of significant importance (particularly where employment is also being terminated). 

Finally, we recommend that employers exercise caution when referencing policies in their employment contracts in relation to the payment of bonuses (or otherwise), given the risk that such policies may be found to have been incorporated into the contract.