By Felicity Simpson

7 June 2017

Contracts of employment often include bonus arrangements and redundancy entitlements linked to company policies.

These policies (or contacts of employment themselves) may incorporate a statement to the effect that these are ex gratia payments made in the “sole” or “absolute” discretion of the employer. Does the employer’s “absolute discretion” enable an employer to reduce or not pay the discretionary payment at any time as they see fit?

Employers need to appreciate that the courts have shown a willingness to imply terms into the contract of employment. It has always been the case that employment contracts are subject to the ordinary rules of interpretation. Discretionary employee payments are no exception.

The 2015 Federal Circuit decision in Russo v Westpac Banking Corporation (Russo) confirmed that an earlier 2010 NSW Supreme Court decision in Silverbrook Research Pty Ltd v Lindley (Silverbrook) was binding. Even though the facts in these decisions were different, the Court was clear in its position – the employer’s discretion was not unfettered. The Court stated that an employer’s discretion in respect of ex gratia payments “should not be construed so as to permit the appellant to withhold the bonus capriciously or arbitrarily or unreasonably”.

The Court in Silverbrook noted that “There may be many circumstances in which it would be legitimate, and conformable with the purposes of the contract, not to pay the bonus.” Essentially, each circumstance will need to be considered individually, in the context of the agreed contract of employment.

The practical implication for employers is that their discretion may not be unfettered. In those circumstances, all discretionary payments must be given due consideration in accordance with the employer’s own policies. Failure to do so, may place an employer at risk of a claim for breach of contract, in line with the above cases.

Employer’s wishing to have absolute unfettered discretion regarding “discretionary payments”, must ensure that the contract of employment is very clearly, precisely states its intentions and seeks to incorporate the criteria set out in Silverbrook. Also, employer’s should carefully consider and review any policies or guidelines used in determining the entitlement to and amount of any discretionary payment.

Further, careful consideration should be given to the inclusion of company policies (in whole or in part) into contracts of employment. Every business has its own specific requirements to be taken into consideration.

 

If you are an employer who pays discretionary bonuses or redundancy payments (or an employee wanting to claim an entitlement to a discretionary payment), please contact Felicity Simpson or a member of the Commercial Law Team.

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