The High Court recently held that B&Q was not entitled to withdraw a discretionary bonus scheme in circumstances where the employees had a legitimate expectation that their bonuses were accruing and would be paid. This decision raises an interesting question for employers – namely, when is a discretionary scheme really discretionary?
In January 2016, the High Court upheld an appeal brought by 10 B&Q workers against a decision of the Employment Appeals Tribunal ("EAT") that the removal of a bonus, which had been paid for several years up to early 2012, was not a deduction of pay in breach of the Payment of Wages Act 1991.
Up until 2012, the employees were eligible to receive a Winter/Summer bonus under B&Q's discretionary bonus scheme. The bonus was paid twice annually. The first payment was payable in June, for the work period August to January. The second payment was payable in November, for the period of February to July. The employees' contracts of employment and employee handbooks clearly stated that “all bonus schemes are discretionary and are subject to the scheme rules. They may be reviewed or withdrawn at any time.”
In April 2012, the employees were advised that B&Q was withdrawing the bonus scheme with immediate effect. No further bonuses were paid. The employees argued that while the employer might be able to cease the scheme prospectively, the employees had a contractual entitlement to the bonus in respect of the period August to January, as this had already been earned.
The EAT held that B&Q were entitled to cease the scheme, stating “if the [employees] were not content with [B&Q] retaining the power to unilaterally review or withdraw the [payments], they should not have entered into such a contract.”
The High Court, however, took a different view. While it accepted that B&Q had wide discretion under the terms of the contract to withdraw the bonus scheme, it emphasised that such discretion must be exercised reasonably. The Court was not satisfied that the terms of the scheme allowed B&Q to withhold the summer bonus, which had already been earned and was due:
“The discretion to withdraw the bonus scheme at any time, in my view, was always intended to apply in futuro and attached to the conferring of bonuses, as yet unaccrued, under the terms of the scheme. The payment of the bonus crystallised as a contractual obligation once it was “earned” in accordance with the terms of the scheme as operated.”
In reaching its decision, the Court noted that “the use of the word ‘discretionary’ is not always determinative of whether a contractual entitlement arises under a bonus scheme.
The case serves as a useful reminder that describing a scheme as discretionary will not necessarily prevent a contractual entitlement arising. Legal advice should be taken when employers are looking at discontinuing or varying the terms of a discretionary bonus scheme in place.