When a choice is not a choice
As a business owner you can choose whether or not to pay staff bonuses, right? “Discretionary” means … well … discretionary – doesn’t it?
Not always says the Federal Court in the recent case of Russo v Westpac. In that case, the court ordered Mr Russo’s employer to pay a discretionary bonus it had withheld due to Mr Russo’s poor performance. Although the case concerned a high ranking bank employee (his annual bonus was a whopping $70,000) the same principles are relevant to any sized employer.
Mr Russo was employed by the bank under an employment contract which clearly stated the payment of any bonus was “at the absolute discretion of Westpac”. For the first two years of his employment Mr Russo’s performance was classified as “effective” under the bank’s performance appraisal procedures and he received annual bonuses of $70,000.
In his final year of employment (prior to being made redundant), Mr Russo’s performance was classified as “needing improvement” and Westpac declined to pay him a bonus.
Mr Russo claimed that the bank had acted unreasonably in finding his performance inadequate and that he was contractually entitled to the payment of the bonus he had received in previous years.
The court followed previous decisions on this topic and confirmed that even where an employment contract states that a bonus is “at the absolute discretion” of the employer there is an implied requirement that the discretion be exercised reasonably.
It further found that Westpac’s assessment of Mr Russo’s performance as “needing improvement” was unfair for a number of reasons including that, in breach of Westpac’s internal policies, Mr Russo’s performance had been assessed without a one on one performance meeting and his performance had not been measured against the performance targets set for him.
Because the assessment of Mr Russo’s performance was unreasonable, this in turn meant that the refusal to pay the bonus was also unreasonable and Westpac was therefore acting in breach of contract. Accordingly, the court therefore ordered Westpac to pay Mr Russo’s bonus of $70,000 and all his legal costs.
The Courts want us to understand that – the decision to pay a bonus or not is not a completely free one.
Even where payments are stated to be at the employer’s sole discretion, any decision on payment must be made on a reasonable basis.
If you are paying bonuses according to performance, it is worthwhile ensuring that the assessment of performance be carried out reasonably and in line with company policies.
If you want the freedom to withhold bonuses due to financial constraints or employee misconduct, the law requires that you include such requirement in your contracts / policies.