In our ‘5 ways in 5 days’ series, we are looking at options to control labour costs which avoid redundancies. Today, we consider:

  • reducing or refusing to pay bonuses; and
  • reducing non-cash benefits

REDUCING OR REFUSING BONUSES

In a range of industries, it is now common to remunerate employees partly through bonus or incentive arrangements. Often, these arrangements are recorded in a detailed incentive plan, or in an enterprise agreement or in the contract of employment. Many employers take the view that these are purely discretionary arrangements, so that the employer can decide how much, or how little, is to be paid to employees from time to time. However, from a legal perspective, this may not necessarily be the case.

The courts have dealt with many disputes about whether an employee is ‘entitled’ to receive a bonus. The key ‘take-away’ from these cases is that the employer does not necessarily have complete flexibility with respect to the payment of bonuses:

  • the court will look closely at the source of the bonus ‘entitlement’ – that is, it will analyse the words used in the contract, agreement or documentation to determine the nature of the entitlement, including whether performance conditions apply;
  • if the employer has a discretion to award a bonus, and exercises it ‘against’ the interests of an employee (for example, by awarding nil even though the performance conditions are met), then it should do so in a way that is not irrational or perverse; and
  • there may be circumstances in which it would be reasonable not to pay the bonus – what is usually not permitted is an ‘unreasonable’, arbitrary refusal to pay a bonus to an employee.

If an employer proposes to reduce or award nil bonuses, it is important for the employer to carefully consider the bonus arrangements it has in place and the justifications for its decision (which should be recorded). Communicating the rationale to affected employees will reduce the potential for demotivation as a result of the decision.

REDUCING NON-CASH BENEFITS

It is also common these days for employers to provide a range of non-cash benefits to employees – for example, subsidised meals, company cars, mobile telephones and insurance cover. These benefits are one of the areas that employers can manipulate to control costs. Indeed, some employers have reduced or removed benefits that may have been in place for significant periods of time (eg twice-weekly company-provided lunches, hire car pickups and health insurance benefits).

In considering how to reduce or remove non-cash benefits, employers need to keep in mind that:

  • some benefits may form part of the terms and conditions of employment under either the written contract or in an enterprise agreement. If so, like salaries, a change to those arrangements may require an employee’s consent and/or a variation to the enterprise agreement; and
  • these types of benefits have often been seen as part of the ‘package’ that an employer offers (even if they are not contractually binding), and their removal might affect motivation if not carefully managed.

Other arrangements fit more squarely into the ‘purely discretionary’ category – such as free (or subsidised) meals and drinks at the workplace and team functions (such as EOFY and Christmas lunches, team ‘away days’).

It may also be possible for employers to amend or update expense reimbursement policies in order to reduce costs to the business. This might include, for example, no longer reimbursing certain discretionary expenses, requiring higher levels of approval for expenses to be incurred or requiring less expensive travel arrangements.

Employers again need to bear in mind that some employees (particular senior executives) may have contractual entitlements to the reimbursement of certain expenses – and that, if so, changing those arrangements will usually require the consent of the employee.