UK: Employers may withhold discretionary bonuses even where performance is satisfactory

Estimated reading time 2 minutes

When determining whether to award a discretionary bonus or not the key issue for the Courts to look at is whether the employer’s decision was irrational or perverse and not whether the employees performance was sufficient to justify a bonus.

Legal Position

Where a bonus scheme is discretionary the employer does not have a complete discretion over whether to refuse to award a bonus.  The employer cannot exercise his discretion in a way which is irrational or perverse.

Case Summary

In this case an employee’s bonus was related to his performance, as determined by the management board.  During the 3 years preceding the year in question the employee had received a good appraisal and substantial bonuses.  In the year in question the employee’s fixed term contract came to an end and he received no bonus and he subsequently brought a claim against his former employer for payment of a sum equivalent to his bonus.

The employee was an economist and he was responsible for forecasting nickel prices.  In the year in question his forecasts were badly wrong, although no more wrong than that of other leading economists, as a result of the global economic crisis.  As a result of this inaccurate forecast the employer made a significant loss and the employee received an unsatisfactory performance rating.

It was held that in the circumstances the employer’s decision not to pay a bonus was not irrational or perverse.  The employee was not permitted to use the failings of other economists or the global economic crisis as a justification for his entitlement to a bonus.

Commentary

It is interesting to note that the court held that the global economic crash should be taken into account when determining whether the employer’s discretion had been exercised rationally.  This appears to conflict with previous decisions of the Court of Appeal and the High Court which had held that the global economic crisis was not relevant in determining employees’ contractual bonus entitlement.

Resources

Humphreys v Norilsk Nickel International (UK) Ltd [2010] EWHC 1867 (QB)

For further information or to discuss the issues raised, please contact Guy Abbiss (guy.abbiss@abbisscadres.com) or Stephen Wright (stephen.wright@abbisscadres.com) on
+44 20 3051 5711.