Payment of a discretionary bonus may not be discretionary
The CaseRusso v Westpac Banking Corporation (2015)
Mr Russo had an employment contract with Westpac, which provided that he was entitled to a discretionary bonus and that certain Westpac policies did not form part of the terms of the contract.
While a redundancy policy was not specified, the contract also stated that should Mr Russo be made redundant, he may be entitled to a pro rata bonus at Westpac’s discretion. The bonus policy stated that to achieve a bonus, an employee must at least achieve an “effective” rating for performance.
In 2011, Mr Russo achieved a “needs development” rating and his position was made redundant 10 months into the 12-month bonus period. Westpac decided not to give Mr Russo a bonus when it terminated his employment.
Mr Russo commenced proceedings alleging, among other things, that he was entitled to receive a bonus payment.
The Federal Court found that:
- Westpac’s redundancy policy was incorporated into Mr Russo’s employment contract;
- Westpac had exercised its discretion not to pay a bonus “capriciously, arbitrarily or unreasonably” and not in accordance with its policies; and
- Mr Russo was contractually entitled to rely on his bonus entitlement being determined in accordance with those policies.
During the hearing, Mr Russo’s manager made admissions that he had failed to follow Westpac’s bonus policy, guidelines and rules. The Court found that had the manager taken the appropriate approach, Mr Russo would have been given a higher performance rating.
Mr Russo was awarded $70,000 in lieu of a bonus payment, and costs.
There are often workplace disputes as to whether or not a bonus payment should be paid. In such situations, ensure that your business exercises its discretion:
- in accordance with the applicable criteria and stated process; and
- in a way that is not capricious, arbitrary or unreasonable.
This means that everyone, including employees, must be clear about what the performance criteria are and these criteria should be documented.
Your employment contracts should include a clear statement providing that the bonus plan and all other policies (including ancillary documents) are not terms of, and are not incorporated into, the employment contract and are therefore not contractually binding.
Please note: Case law is reported as correct and current at time of publishing. Be aware that cases in lower courts may be appealed and decisions subsequently overturned.
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