by David McCauley Associate, Employment, Pensions and Incentives Group at McCann FitzGerald LLP
Many employers routinely consider the award of bonuses to their staff at this time of year and inevitably this leads to disputes with some staff members about the failure to award a bonus to them at all or at a particular level. This will include those in the banking sector where the restrictions on executive’s pay (including a ban on variable pay) have been relaxed in recent months. In this briefing, we set out some factors of which employers should be mindful when making bonus-related decisions.
Entitlement to a bonus?
The contractual status of a bonus is a threshold consideration. Typically, offer letters and contracts of employment will provide only for eligibility to earn a bonus, rather than any express entitlement to a bonus, and will be couched in terms which provide that the operation of the bonus scheme, and the level of any award, is at the discretion of the employer. Ordinarily, awards of bonus will depend on the performance of the employer’s business, or the employee’s work performance, or both, in the preceding year.
Nevertheless, even where bonuses are described as discretionary, an employee might have a contractual entitlement to it as an implied term of the employment contract. This might arise, for instance, by virtue of custom and practice whereby an employee receives a bonus at a particular level consistently over a prolonged period of time.
Where a contractual entitlement exists and an employer fails to pay a bonus, a breach of contract claim may lie, or a complaint of an unlawful deduction from wages may be made to the Workplace Relations Commission. A failure to pay such a bonus might also amount, or contribute, to a constructive dismissal. Bonuses may, in certain circumstances, be taken into account in loss of earnings awards in cases of unfair or constructive dismissal.
Any entitlement to a bonus may be subject to the employee remaining in employment (and not being in their notice period) at the time of the award, and not being subject to any performance measures or disciplinary sanctions. However, there have been cases in which the courts have refused to imply a term to this effect where no express condition exists.
Employers should also be aware that while it may enjoy a discretion to terminate a bonus scheme, this may not permit employers to withhold bonuses which employees have already earned and accrued in accordance with the scheme as it was at the time.
Exercising discretion to award a bonus
Bonuses will ordinarily be assessed on the basis of objective individual and/or business performance criteria. It is crucial that employers set out in clear terms the basis on which an award is made or not made at a particular level and by whom that decision is made.
A bonus may take many forms, including stock options where the relevant scheme allows for it. Care should be taken, where bonuses are awarded subject to certain conditions, that these do not amount to a restraint of trade or penalty clause, and are therefore contrary to public policy and void. A recent English case found that a bonus policy which disentitled employees to a bonus where they had received a formal warning in respect of sickness absence during the relevant financial year amounted to discrimination on disability grounds.
Assuming a bonus is discretionary, employers will not enjoy a carte blanche when it comes to the exercise of that discretion, which must not be exercised in a perverse, capricious or irrational way, and which must be exercised bona fide and consistently with the implied duty of trust and confidence.
The recent case in the High Court of Keating v Shannon Foynes Port Company related to the failure of the Board of a commercial semi-state body to pay discretionary performance related bonuses to a CEO, notwithstanding that such bonus payments had been ‘awarded’ by the remuneration committee of the semi-state body. That failure was ostensibly based on prevailing policy of the Minister of Transport, Tourism and Sport against the payment of such bonuses notwithstanding evidence that the directors on the Board themselves believed payment of a bonus to the CEO to be in the company’s best interests. However, the High Court held that in subordinating what the directors considered in good faith to be in the best interests of the company to the wishes (or policy) of the company’s main shareholder (the Minister), the directors had breached their duties under company law, which were owed to the company alone. The discretion of the board to award the bonus must be exercised in the best interests of the company, with shareholder policy only one factor to be considered in the analysis of the company’s interest. While that breach of director’s duties was not actionable by the employee per se, it was a factor in determining the reasonableness of the exercise of discretion in respect of payment of bonuses contained within the CEO’s employment contract. Where the decision to award a bonus, then, is taken by directors, this case supports the proposition that the best interests of the Company must be taken into account in deciding whether, and at what level, to award a bonus.
As the Court of Appeal in England & Wales has stated
While equality law does not oblige employers to treat employees identically, employers should be particularly mindful to avoid any discrimination amongst employees based on any protected ground(s) (being gender, marital status, family status, age, disability, sexual orientation, race, religion, and membership of the Traveller community). Any suggestion of victimisation or penalisation (say, of a whistle-blower) should also be studiously avoided. Where there could be any such inference, well-advised employers will be capable of demonstrating the objective reasons for any differential treatment.
Employees on leave
Care should be taken regarding employees absent on sick leave during the performance year and the WRC in a recent case has found that there was an unlawful deduction from wages where there was a lack of transparency by an employer in seeking to link the bonus scheme to an employee’s sick leave.
The general principle in relation to maternity leave is that where a bonus comprises payment for work done, an employer is entitled to make a pro rata reduction in the bonus award for an employee’s absence on leave. However in many cases, there is scope for dispute about whether bonuses are in respect of work done. This area can be fraught with risk, and close consideration should be paid to whether a bonus is expressed to relate to company performance only or in combination with individual employee performance.
It has been determined that agency workers are not entitled to equal treatment in respect of bonuses. However, the position in relation to independent contractors is somewhat murkier, and, depending on the terms of the scheme, the award of a bonus to such a contractor could support claims of employment status. Accordingly, such awards should be carefully considered.
While employers will be mindful that bonus pay is relevant ‘remuneration’ for the purposes of gender pay gap reporting, this is unlikely to be a relevant factor in exercising discretion in respect of the award of bonuses.
While the law will allow a considerable degree of latitude to employers in respect of the exercise of a discretion to award a bonus, the mutual obligation of trust and confidence will require that employers exercise care in coming to bonus decisions. In particular, employers should rely on transparent criteria in the exercise of that discretion, and should be in a position to demonstrate the objectivity and rationality of their decisions so that they cannot be characterised as arbitrary, capricious or unreasonable.
This article has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.