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Employers – Workers’ Bonuses Must Be ‘Fair and Reasonable’

Employers often go to great lengths to ensure that they retain complete control over workers’ entitlements to bonuses. However, one important case has underlined that such discretions must be exercised reasonably and fairly and that even the most tightly drawn contract will rarely oust the power of the courts to intervene.

A software company’s contracts with its employees included a provision by which it sought to retain ‘absolute discretion’ as to whether bonuses had been earned and as to the amount of such payments. An exclusive right to resolve any disputes arising under the bonus scheme was also purportedly conferred on management.

However, in awarding an ex-employee of the company £6,701 in respect of a bonus underpayment, a judge found that the bonus scheme was subject to an overriding requirement that decisions made under it had to be rational. The bonus award made to the man was not in accordance with the detailed provisions of the scheme and was neither fair nor reasonable.

In dismissing the company’s challenge to that decision, the Court of Appeal agreed that the employer’s discretion was circumscribed by a requirement of rationality. The Court also noted that the man and his team had been given an assurance that they would receive the lion’s share of a bonus generated on the sale of security software to an international bank.