Discretionary bonus determined by objective rules

Cases

Discretionary bonus determined by objective rules

A bonus that was contested by a former bank executive was found to be payable because it should have been granted on fair and objective grounds, despite being expressed to be a bonus payable at the employer’s discretion.

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A bonus that was contested by a former bank executive was found to be payable because it should have been granted on fair and objective grounds, despite being expressed to be a bonus payable at the employer’s discretion.

[Full text of this case: R v Westpac Banking Corporation [2015] FCCA 1086 (12 May 2015)]

This was an application by a former employee seeking payment of an ex gratia bonus payment following the employee’s retrenchment.

The issue was whether the employer was obliged to not act capriciously, arbitrarily or unreasonably when assessing the employee’s performance.

A related issue was whether the employer breached Australian Consumer Law in relation to its conduct when deciding whether to award the retrenched employee an ex gratia bonus payment.

Submissions


Westpac stated that the central question in these proceedings was whether a decision made by Westpac not to exercise its discretion to make an ex gratia incentive payment to a retrenched former employee under a non-contractual policy breached the employee’s contract of employment.

Breach of contract


Federal Circuit Court Justice Lloyd-Jones said the claim advanced by R was that Westpac breached the express contractual terms by failing to pay R a bonus for FY 2010–11.

R’s manager admitted that if he had properly complied with his obligations, R would have received a higher rating and in all likelihood would have been paid a bonus. Westpac argued that R was inviting the court to create a contractual liability in relation to matters that the parties had expressly agreed would be in the “absolute” or “complete” discretion of Westpac, and under documents expressly stated not to have any contractual force.

Westpac maintained that it did not act dishonestly or improperly in deciding not to exercise its discretion not to make an ex gratia incentive payment to R, and that it made a business judgement open to it based on evaluating the available information.

Contract in favour of employee’s position


The court was satisfied that the proper construction of the Employment Contract was that although the relevant polices may not have general application as contractual terms, they do for the specific purpose of determining R’s termination entitlements on redundancy.

Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 held that there were limits on the scope of discretion when finding that a party was not permitted to withhold a bonus capriciously, arbitrarily or unreasonably. Such discretion is required to be exercised honestly and comfortably for the purposes of the contract. This was supported in subsequent case law.

Silverbrook remained good law because the decision of the immediate NSW Court of Appeal remains binding on this Court. Westpac’s submissions were rejected:

“Westpac has sought to distinguish Silverbrook on the basis that the principles in that case are essentially principles of construction, how to construe a right or and implication. It really does not matter whether it is a process of construction or process of implication as it has the same result. In Silverbrook, the relevant bonus entitlement that their Honours were dealing with was a bonus entitlement which was to be given at the sole discretion of the employer.”

The wording is not dissimilar to that in the matter before this Court. In the current proceeding the words are “absolute discretion” where in Silverbrook they were “sole discretion”. Either way, in the Court of Appeal, their Honours said that such discretion would not be exercised “capriciously, arbitrarily or unreasonably.”

Westpac was ordered to  pay the applicant the sum of $70,000 within 28 days.

The bottom line: The NSW Court of Appeal (Silverbrook) found that even when an employment contract appears to give total discretion to an employer to decide on bonus payments, a bargained-for bonus that is to be assessed against set objectives should receive a reasonable construction and not permit the employer to choose arbitrarily or capriciously that it need not pay money when the set objectives have been satisfied. That authority remains good law.

Russo v Westpac Banking Corporation [2015] FCCA 1086 (12 May 2015) 

See also: Objective assessment of bonus required: appellate court 

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