A costly lesson for employers
A recent tribunal ruling carries an important warning for employers. In short, it shows when a discretionary bonus becomes enforceable. An employer promised an employee a discretionary bonus as an incentive. However, the employer later tried to reduce the agreed figure. Crucially, the tribunal disagreed with that approach.
What the case involved
A global cloud hosting platform introduced a bonus incentive scheme. According to its slide deck, sales staff could earn “up to 1%” of revenues. This applied to invoicing any new client over the first twelve months. Importantly, the Sector Lead Head (SLH) had to approve each award.
Soon afterwards, the claimant secured a major contract with a prominent retailer. Therefore, the line manager emailed the SLH to recommend the full 1% commission. In turn, the SLH authorised the bonus in a recorded ‘memo’. However, senior management balked at the £516,082 payout. Consequently, they tried to apply a £150,000 cap retrospectively.
How the tribunal decided
Initially, the claim for unlawful deduction of wages failed. The tribunal said no legal entitlement had crystallised. Nevertheless, the claimant appealed the decision. On appeal, the judges overturned that ruling. After all, the scheme’s terms were clear, met and approved.
Why this matters
Once the SLH authorised the bonus, the entitlement legally materialised. As a result, the employer could not cap the payout. Nor could it demand extra management sign-offs. Put simply, this case shows when a discretionary bonus becomes enforceable.
Therefore, discretionary schemes do not grant employers unlimited power. Instead, a binding obligation forms once three things happen:
- The employer establishes a discretionary bonus framework.
- The employer communicates the specific terms clearly.
- The employer then exercises its discretion to approve the award.
Consequently, employers should review all bonus incentive schemes carefully. Otherwise, they may create unexpected and costly obligations.
Review your schemes today
Worried your bonus schemes could catch you out? Get in touch with our team today. Together, we will review your arrangements and protect your business from unwelcome surprises.
