Discretionary bonuses - bonus labelled 'discretionary' may still be contractual

2 February 2009

Background
In Small v The Boots Co Plc and Boots UK Ltd, Mr Small and other warehouse employees for Boots UK Ltd made claims to the Employment Tribunal for unlawful deduction from wages in respect of bonuses to which they thought they were entitled.  The warehouse undertakings had been transferred to another organisation and the Claimants transferred in accordance with TUPE. Ultimately, the warehouse undertakings, including the warehousemen, were transferred back to Boots several years later. Whilst employed by the transferee, they received no performance related bonus but those still employed by Boots continued to receive theirs.

Employment Tribunal Decision
The ET found, in favour of the Respondents, that there was no unlawful deduction from wages since the performance-related bonus was discretionary.  The ET judgment referred to the Staff Handbook which stated that: “After a qualifying period of service, there are additional discretionary benefits, such as bonuses… However, they are not intended to be contractual.”  The Employment Judge decided that: “The great weight of documentation prior to the first transfer of undertaking is couched in language of discretion rather than obligation.”

Employment Appeal Tribunal
The Claimants appealed to the EAT which held that the ‘discretionary bonus’ did have contractual effect despite the wording in the Staff Handbook.  It found that the Employment Judge should have determined the meaning of ‘discretionary’ in the handbook and to what the discretion applied.  This was not clear as the discretion could have applied to the provision of an overarching bonus scheme, to the decision each year to operate a bonus scheme, to the method of calculating the bonus as well as a number of other possibilities.

Second, the EAT held that the Employment Tribunal should have taken into account all relevant circumstances, including the fact that Boots had invariably made the bonus payment over many years, when deciding whether the documents should be construed as giving the Claimants a contractual entitlement to a bonus.

Third, it found, following a line of recent authority,  that “if Boots and Unipart [the transferee] were merely obliged to exercise a discretion in relation to the provision of a bonus, that discretion must be exercised rationally and in good faith.”

It remitted the unlawful deduction from wages claims for rehearing.

Comment
It is, of course, still possible for employers to have discretionary bonus schemes but clients are advised to be careful.  The label ‘discretionary’ in the contract of employment and/or handbook may not be sufficient. The documents should make absolutely clear that it is the decision to pay the bonus to each employee in every bonus period that is the discretionary aspect of the scheme.  Employers should be aware that if they pay out a discretionary bonus every year, or normally do so, this might provide a basis for an employee to argue that there is a contractual obligation to continue to do so.  Ultimately, if it is clear in the documents what the discretion applies to and the employer exercises its discretion rationally and in good faith, the employer will be better protected.