Many employment agreements contain a bonus provision which will
often be couched in terms that, on the face of it, seem to vest
complete control of the operation of the bonus with the
As an employer, you will have an interest in having such
control, given the bonus may or may not be warranted for each
However, a common mistake that employers can make in the
exercise of a bonus scheme is to presume that the terms of the
bonus allow them absolute discretion. So, in situations where the
employer has declined to pay a bonus, they will be surprised to
find a challenge to their decision by the employee. It was, after
all, their decision and theirs only.....wasn't it? - It was
labelled as "discretionary", after all.
These employers will, later, be even more surprised when the
Employment Relations Authority or Employment Court ("the
courts") tells them they were wrong.
So, how do apparently discretionary terms end up becoming an
enforceable part of the relationship?
The starting point is found at s 103(1)(b) of the Employment
Relations Act 2000 (the Act), which provides for personal
grievances for "unjustified disadvantage". For such a
grievance to exist, a "condition of employment" must be
altered by the employer, unjustifiably, and to the disadvantage of
Many employers will not naturally view a discretionary bonus as
a "condition of employment". So what exactly is a
condition of employment and is a bonus one of them?
The Courts have held that a condition of employment is:
"Broadly speaking, terms of employment are all the
rights, benefits and obligations arising out of the employment
relationship. The concept is necessarily wider than the terms of an
A review of several bonus cases reveals that this definition has
been used by the courts to capture most bonus clauses from
employment agreements, regardless of labels such as
"discretionary". For example, bonus payments
that have been founded in documents which clearly stated that they
were not a part of the employment contract, and could be withdrawn
or modified by the employer as they saw fit, have still been held
to be a condition of employment. The legal point the courts are
making is that a condition of employment is a wider concept than
the written terms of the contract.
What an employer should appreciate is where to properly focus
its attention. Just because the Courts will classify a bonus clause
as a condition of employment, does not mean that the employer is
then obligated to pay the bonus.
What the Courts have stated is that an employer, using a
discretionary bonus clause, is bound to exercise its discretion to
the employee in good faith. So, where the clause provides for
discretion to be exercised, the employer must do so, fairly and
honestly. If at the end of such an exercise, no bonus will be
payable, then so be it and the employee should have no complaint
– the employer will have discharged its obligation to
exercise its discretion.
The important point for employers is that it will be difficult
to argue that a bonus is not caught under the widely interpreted
provision at s 103(1)(b) of "condition of employment", no
matter what label is put on it.
What an employer should do however is focus on what is contained
within the agreement itself. The bonus calculation and whether any
amount will be paid should be expressed as discretionary. From
there, the employer should ensure that:
there is a history of discretionary calculation treatment.
the payments are not incorporated into wages and are instead
paid as separate payments.
the exercise of the discretion is done in good faith.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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