In December, employers turn their minds to the possibility of Christmas bonuses. What should employers be thinking about before the bonus announcements are made?
The first thing employers should consider is the contractual status of the scheme and how far the employer has discretion over the amounts payable. Was the bonus scheme incorporated into the employee’s contract? Was it part of a separate memorandum which was incorporated into the contract by express reference? Merely because bonus schemes are called “discretionary” in employment documentation may not mean that the scheme nevertheless has contractual status.
Even when the scheme result may be discretionary, the employer’s obligation to exercise that discretion may be strictly controlled by law so that the discretion is not exercised in a way that is capricious, irrational or perverse.
Australian employment law recognizes that employers are under a duty to act reasonably. This means that they should always follow a fair process in making decisions and ensure that all relevant factors (and no irrelevant factors) are taken into account.
Words from employers often have legal meanings even if the employer does not think so. It is often tempting for managers to say warm words about bonuses in a spirit of motivation. This can often lead to unexpected results. Imagine a manager or employer telling an employee he would be looked after when dividing up bonuses or commissions. When, inevitably, the employee does not feel looked after, he (or she) may bring a claim for breach of contract of employment.
So what practical advice should employers be given when determining whether or not to give anyone a bonus and, if so, how the bonus pool should be divided up?
First, make sure the rules of the scheme are well documented and follow them. Remember that any ambiguity will be decided in favour of the employee.
Secondly, be consistent. Watch what you have awarded to other employees. Make sure that any differences in treatment have clear reasons.
Thirdly, be prepared to explain your decision and have solid and sensible reasons for why your decision is reasonable and justifiable.
Fourthly, consider the performance and contribution of employees who are currently on different types of leave – maternity, parental, long service, medical or compassionate. What about employees who have a disability? Are they less likely to achieve bonus targets and does this mean the employer may be vulnerable to claims of discrimination?
Fifthly, take advice from lawyers experienced in employment law. The cost of the conference will be insignificant if employees decide to challenge the distribution of the bonus scheme at the Fair Work Commission or in Victorian courts.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.