If employers wish to retain a wide discretion when it comes to paying bonus payments they need to be very clear about which elements of the scheme are discretionary – merely using the word “discretionary” will not be sufficient to avoid the risk of a claim. (Small & ors v The Boots Co PLC and Boots UK Ltd).
The payment (or rather the non-payment!) of discretionary bonuses is a hot potato at the moment. This recent decision of the Employment Appeal Tribunal acts as a reminder to employers that they need to be very careful when drafting discretionary bonus schemes if they wish to avoid claims in the event of non-payment of such bonuses, as Tribunals will scrutinise them closely to determine which elements are discretionary. Employers need to be clear about which components of the scheme are discretionary – the decision to pay a bonus at all, its calculation, its amount, timing or all of the above? Provided they do this they should retain a wide discretion when it comes to the relevant decisions.
In the Boots case a group of warehousemen had received performance-related bonuses until the warehouse operation in which they worked was transferred from Boots to Unipart by virtue of the TUPE Regulations. They did not receive a bonus whilst employed by Unipart. They subsequently TUPE-transferred back to Boots and brought unlawful deductions claims arguing that they were contractually entitled to bonus payments in respect of their employment by Unipart and re-transfer to Boots.
The EAT made it clear that the fact that Boots had described the bonus scheme as “discretionary” in its documentation was not determinative of the question of whether the claimants had a contractual entitlement to a bonus. It was unclear from the documentation to what aspect of the scheme the purported discretion was attached – was it to the decision whether to pay a bonus at all, to its calculation or to its amount? The EAT also said the fact that Boots had paid the bonus every year since 1967 (except twice when performance targets were not met) was a relevant factor when determining whether the scheme was genuinely discretionary.
Employers should also remember that even if a scheme is genuinely discretionary they are still under an obligation to exercise their discretion properly. They must exercise their discretion in a way that is not discriminatory, irrational, arbitrary or perverse.