Describing a bonus scheme as 'discretionary' may be no
excuse for not paying a bonus.
An employee can allege that it is an implied term of the
contract that the employer will act with due regard for the
purposes of the contract and not act capriciously or unfairly.
Now a landmark case has found an obligation on an employer to
set reasonable targets and reasonably assess the amount of
Landmark bonus case
In 2003, Dr Robyn Lindley commenced a business development role
with Silverbrook Research.
Lindley's salary was $210,000 per annum, and her employment
contract included an annual performance bonus of $40,000, subject
to the following conditions:
Silverbrook would assess Dr Lindley's performance against
set objectives at the end of each quarter, commencing from the date
of her employment. Provided her performance satisfied the set
objectives and subject to the condition below, one quarter of the
annual performance bonus would be paid to Lindley within 21 days of
the end of each quarter.
The decision as to whether Dr Lindley should receive the
performance bonus was entirely within the discretion of
Despite the bonus clause, Dr Lindley was never given a chance to
receive a bonus as performance objectives were never set. This
formed the basis for a breach of contract claim after Dr Lindley
resigned from her employment in 2008.
Silverbrook defended the allegations on the grounds that the
latter clause clearly gave it discretion over awarding bonuses. A
company director told the court that even if performance objectives
had been set and achieved, bonuses would not have been granted to
The District Court judge accepted that from 2007 (when Dr
Lindley's request for a pay increase was denied), the chances
were negligible that she would have received a discretionary bonus.
However, had the bonus process been followed, there was a 75%
chance in Year 1 that the company would have exercised its
discretion to pay the bonus, falling to a 60% chance in Year 2 and
a 50% chance in Year 3. The value of the 'lost chance' was
$74,000 plus interest.
Silverbrook succeeded to some extent on appeal but not on the
bonus issues. Allsop P, with whom Beazley JA of the NSW Court of
Appeal agreed, found that there may be circumstances where it would
be legitimate and conformable with the purposes of an employment
contract not to pay a discretionary bonus - for example, if there
is financial stringency or misbehaviour by an employee.
What would not be permitted, however, is an unreasoned,
unreasonable and arbitrary refusal to pay anything. This would be a
denial of the very clause that had been agreed.
Implications for employers
Employers need to be aware that the bonuses and incentive
payments that they thought were discretionary may in fact be found
by a court not to be discretionary at all.
Although a bonus can be described as discretionary, there may
nevertheless be an obligation on employers to set reasonable
targets and reasonably assess the amount of bonus.
DLA Phillips Fox is one of the largest legal firms in
Australasia and a member of DLA Piper Group, an alliance of
independent legal practices. It is a separate and distinct legal
entity. For more information visit
This publication is intended as a first point of reference and
should not be relied on as a substitute for professional advice.
Specialist legal advice should always be sought in relation to any
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Australian employees receive certain entitlements (such as annual leave and superannuation) where contractors do not.
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