Many of the decisions that an employer makes about its staff involve exercising discretion, to some extent or other. Obvious examples include making a bonus award or conducting pay review but, equally, using a mobility clause to relocate employees, changing employment terms or enhancing sick pay can all be discretionary decisions too.

Case law has long established that employers do not have a totally free rein when making such decisions and that they must exercise their discretion rationally and in good faith. It is important to emphasise that this is not the same as saying that employers must act fairly or reasonably, which would imply a right to a fair bonus or reasonable pay rise. Moreover, courts have consistently demonstrated that they will be reluctant to closely assess or intervene in matters of employer discretion and pursuing a legal challenge over such decisions has been a high hurdle for employees to overcome.

However, last year, an important Supreme Court decision (Braganza v BP Shipping Ltd) challenged conventional wisdom and raised the spectre of an increased likelihood of judicial scrutiny of employers’ discretionary decisions. Worryingly for employers, the case imported principles more commonly seen in judicial review applications against government actions. It went further than previous employment cases, making clear that courts can and will scrutinise decisions, including assessing whether any relevant factors have been excluded or irrelevant factors taken into account. The case also raised difficult questions about the burden of proof, seeming to suggest that it might be for the employer to prove it acted lawfully.

The Braganza case came from left field and left employers and left their advisers scratching their heads. Was the increased scope for judicial intervention an anomaly reflecting the specific factual circumstances or a new approach, with general application to employment discretion? The facts of the case were unusual; they concerned BP’s determination of whether a former employee had committed suicide and hence was excluded from the terms of a life insurance policy. This left open the question of how far these principles would extend into more everyday decisions about pay or employment terms and whether it was significant that (i) the Braganza decision was about determining whether particular facts had happened, rather than simply exercising judgement and (ii) that the case hinged on the employer’s reliance on what was effectively an exclusion clause. The legal uncertainty caused by the case has kept employment law geeks engaged in lively debate for many months.

Now, a recent Court of Appeal case (Hills v Niksun Inc) has applied the Braganza principles in a more mainstream context for the first time. The case concerned an employer’s decisions about the operation of aspects of its commission plan and was much more similar to the type of discretion decision-making by employers that occur frequently in most businesses. In the Niksun case, the Braganza case was cited in support of the employee's arguments, saying that once he had shown grounds to think the decision might be irrational, the burden of proof lay with the employer to show its decision was fair and that it had not considered irrelevant factors nor ignored relevant ones. The Court of Appeal found in favour of the employee, agreeing that the employer had failed to show it had acted legitimately. However, it is frustratingly hard to draw firm legal principles from the decision, as the Braganza principles were not a core part of the reasoning; there were other factors in the case that the court relied on, including the employer’s failure to operate within the specific terms of the commission scheme and the absence of key witnesses.

What does all of this mean for employers? Well, unfortunately, there remains significant legal uncertainty over the law on employers’ discretion. The Niksun case does seem to confirm conceptually that the Braganza principles can apply in pay decisions, although it doesn't really help us understand how. In practical terms, employers should:

  • Check their contracts and relevant plan rules to make sure that they fully understand the extent of their discretion and any process requirements. Don't make assumptions; most contracts will explicitly or implicitly put limits on the way discretion can be exercised.
  • Be aware of the increased potential for scrutiny of decisions and ensure that any records show that decisions were considered within the contractual framework and based on sensible, relevant business reasons.
  • Act consistently and, if particular employees are treated different to others, ensure that they can explain why.
  • Introduce procedural safeguards like checks and balances to review provisional decisions before they are confirmed.
  • Watch this space for further developments in this fast-moving and important area. We will keep you posted.