Pub­li­ca­tions

When a choice is not a choice


In Brief

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.


The Facts

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 Deci­sion

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.

Lessons

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.