Discretions and bonus schemes: Can a discretion ever be absolute?

Employment law practitioners are often faced with clients seeking advice about the drafting of bonus schemes and the possibility of successfully bringing legal proceedings for unpaid bonuses.

The first question employment lawyers must invariably ask is whether the bonus scheme provides guaranteed bonuses, or whether they are discretionary in nature. It had long been thought that if a bonus was discretionary in nature, an employer had no contractual obligation to pay the bonus.

This was as a result of the fundamental legal principle confirmed in Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 that damages are not recoverable by an employee in respect of additional benefits that the contract did not oblige the employer to confer even though the employee might reasonably have expected the employer to bestow benefits on him in due course (Macken, O'Grady, Sappideen and Warburton, Law of Employment, 4th ed, Lawbook Co, 1997, p 303).

Australian employment lawyers are however aware of English case law (described briefly in this article), limiting the extent of the absolute discretion to not pay a bonus. Importantly for Australian practitioners, a very recent and important New South Wales Court of Appeal decision has now considered this same issue.

The decision is important when advising Australian employers or employees when disputes arise concerning the exercise of a discretion in a bonus scheme.

English case law

Bonus for individual performance: Clark v Nomura International Plc

The most well-known United Kingdom decision is Clark v Nomura International Plc 2000 IRLR 767. Mr Clark was employed as an equities trader on an annual salary...