As a business owner you can choose whether or not to pay staff
bonuses, right? "Discretionary" means ... well ...
discretionary – doesn't it?
Not always says the Federal Court in the recent case of
Russo v Westpac. In that case, the court ordered Mr
Russo's employer to pay a discretionary bonus it had withheld
due to Mr Russo's poor performance. Although the case concerned
a high ranking bank employee (his annual bonus was a whopping
$70,000) the same principles are relevant to any sized
Mr Russo was employed by the bank under an employment contract
which clearly stated the payment of any bonus was "at the
absolute discretion of Westpac". For the first two years of
his employment Mr Russo's performance was classified as
"effective" under the bank's performance appraisal
procedures and he received annual bonuses of $70,000.
In his final year of employment (prior to being made redundant),
Mr Russo's performance was classified as "needing
improvement" and Westpac declined to pay him a bonus.
Mr Russo claimed that the bank had acted unreasonably in finding
his performance inadequate and that he was contractually entitled
to the payment of the bonus he had received in previous years.
The court followed previous decisions on this topic and
confirmed that even where an employment contract states that a
bonus is "at the absolute discretion" of the employer
there is an implied requirement that the discretion be exercised
It further found that Westpac's assessment of Mr Russo's
performance as "needing improvement" was unfair
for a number of reasons including that, in breach of Westpac's
internal policies, Mr Russo's performance had been assessed
without a one on one performance meeting and his performance had
not been measured against the performance targets set for him.
Because the assessment of Mr Russo's performance was
unreasonable, this in turn meant that the refusal to pay the bonus
was also unreasonable and Westpac was therefore acting in breach of
contract. Accordingly, the court therefore ordered Westpac to pay
Mr Russo's bonus of $70,000 and all his legal costs.
The Courts want us to understand that – the decision to
pay a bonus or not is not a completely free one.
Even where payments are stated to be at the employer's sole
discretion, any decision on payment must be made on a reasonable
If you are paying bonuses according to performance, it is
worthwhile ensuring that the assessment of performance be carried
out reasonably and in line with company policies.
If you want the freedom to withhold bonuses due to financial
constraints or employee misconduct, the law requires that you
include such requirement in your contracts / policies.
An employee that refused a reasonable offer of settlement was ordered by the FWC to pay his ex-employer's legal costs.
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